ASX erases early gains, tracking Wall Street as oil prices, bonds lift

The Australian sharemarket bounced higher in early trade, led by energy stocks, as bargain hunters waded in after it hit a three-month low in the previous session.

The S&P/ASX 200 added 21.7 points, or 0.3 per cent, to 8694.20 as of 10.13am AEST, with eight of its 11 industry sectors in the green. The benchmark lost 0.9 per cent on Tuesday and closed at its lowest level since early June as oil prices and bond yields jumped, boosting expectations for interest rate hikes to rein in inflation. The Australian dollar was lower at US71.31¢.

On Wall Street overnight, US stocks slipped after oil prices and the bond market cranked up the pressure. The S&P 500 fell 0.4 per cent. The Dow Jones Industrial Average dropped 328 points, or 0.6 per cent, and the Nasdaq composite sank 0.8 per cent.

Wall Street felt pressure as the yield on the 10-year Treasury, which is the centrepiece of the US bond market, climbed to 5 per cent from 4.97 per cent late on Monday and briefly touched 5.04 per cent overnight. It’s been jumping to its highest level in years, and Monday was the first time it breached 5 per cent since 2023.

Higher yields mean everyone from the US government to households to businesses must pay more in interest to borrow money, which slows the overall economy. They also make people less willing to pay high prices for stocks because they can earn more from sitting in bonds, which are considered safer investments.

“The result is a market that must work harder to generate earnings growth just as investors become less willing to pay premium valuations for that growth,” according to Darrell Cronk, president of Wells Fargo Investment Institute.

The last time the 10-year yield was consistently above 5 per cent was around the turn of the millennium, and it’s been a long march back since it bottomed out below 0.50 per cent in 2020. The pace has accelerated since February, after the war with Iran sent oil prices much higher.

That raised worries about high inflation potentially lasting for years, which are layering atop longstanding concerns about the US government’s massive debt level and other issues.

Oil prices rose further Tuesday following several sharp swings in the morning. The price for a barrel of Brent crude, the international standard, climbed 2.9 per cent to settle at $US108.75.

It remains well above its $US72 level from early July and from before the war with Iran began in February, as doubt continues about whether the fighting will allow oil tankers to freely exit the Persian Gulf anytime soon through the Strait of Hormuz.

Inflation remains high enough that the widespread expectation is that the Federal Reserve will announce on Wednesday [early Thursday AEST] that it will hike the federal funds rate for the first time in three years.

Traders are still betting on a slight chance that the Federal Reserve could hold off on hiking interest rates, though. If it does, the market could swing because investors may see it as a sign that the Fed is less committed to getting inflation lower.

Fed officials will also release forecasts for where they see interest rates heading in upcoming years, providing another opportunity to inject uncertainty into the market.

On Wall Street, stocks of companies that depend on customers having enough spare cash to spend on their products fell to some of the sharper losses.

Chipotle Mexican Grill dropped 5.9 per cent. Darden Restaurants, the company behind Olive Garden and Longhorn Steakhouse, sank 4.3 per cent.

Dollar Tree, whose customers may have less financial cushion than others, fell 5.4 per cent.

Elsewhere on Wall Street, stocks enmeshed in the cryptocurrency industry sank after the US Senate voted to block legislation creating a new regulatory framework for crypto, while demanding more limits on President Donald Trump’s investments. The price of Bitcoin slumped 3 per cent to $US75,725.19 at10.20am AEST.

Coinbase Global fell 10.1 per cent, and Robinhood Markets lost 3.4 per cent.

Several artificial-intelligence stocks meanwhile held steadier following their worldwide slide the day before, after leaders of the AI industry called for a slowdown in development to address safety issues for humanity. Nvidia added 0.6 per cent a day after its 3.4 per cent drop was the heaviest weight on the S&P 500 index. Advanced Micro Devices climbed 2.2 per cent.

Such stocks led the US market to records for years, but they’ve come under pressure recently on worries that their prices shot too high in the frenzy around AI.

In other international markets, indexes fell across much of Europe and Asia. But for several, the drops were not as sharp as Monday’s caused by the slide for AI stocks.

South Korea’s Kospi index, for example, fell 0.9 per cent following Monday’s 3.3 per cent drop.