Market Overview
Stronger-than-expected US inflation data for September has dramatically increased the likelihood of further Federal Reserve interest rate hikes. This spurred a significant sell-off in US equity markets, particularly hitting technology and chipmaker stocks, as bond yields spiked. The bearish sentiment, coupled with elevated oil prices driven by geopolitical tensions, is expected to weigh on Australian and broader Asian markets as they prepare to open.
Markets
US equity markets closed sharply lower, led by the Nasdaq Composite. The S&P 500 (^GSPC) ended the day down 1.11% at 7,718.94. The Nasdaq Composite (^IXIC) finished 1.88% lower at 26,692.87, while the Dow Jones Industrial Average (^DJI) declined 0.09% to 51,621.48, with losses somewhat offset by gains in healthcare stocks.
Looking ahead, Australian shares are set to open slightly down, with ASX 200 (^AXJO) futures pointing down 29 points, or 0.3%, to 8716. The ASX 200 had closed down 0.64% at 8,727.90 in its previous session.
In the bond market, the US 10-Year Treasury yield (^TNX) closed at 5.190%, down 2.70 basis points.
Currency markets saw the Australian Dollar (AUDUSD=X) trade at 0.6974, up 0.25%, while the US Dollar Index (DX-Y.NYB) closed at 102.54, up 0.35%, hitting a fresh 18-month high.
Commodities moved higher, with Brent Crude (BZ=F) closing at $105.96, up 0.26%, and WTI Crude (CL=F) closing at $95.05, up 0.97%. Gold (GC=F), meanwhile, finished down 1.31% at $4,122.50.
What Drove Markets
US Inflation and Fed Policy Outlook
US consumer prices rose 0.6% in September, in line with expectations, while annual inflation reached 3.7%, exceeding forecasts of 3.6%. Core CPI, excluding volatile food and energy components, also surpassed expectations, advancing 0.3% month-over-month and 2.6% year-over-year. This hotter-than-expected inflation data has significantly increased the probability of another Federal Reserve rate hike. The CME FedWatch Tool now indicates the odds of a quarter-point hike in October have risen to approximately 47% from nearly 22%. Citi has adopted a more hawkish stance on a Fed rate rise, with Osaic chief market strategist Philip Blancato noting the inflation data “puts the Federal Reserve very much in play for December.” Blancato, however, stated that he is not overly concerned about equity or bond markets, as he views the latest rise in inflation as transitory and believes much of it has already been priced in.
Technology and Chipmaker Rout Deepens
Wall Street saw a deepening technology rout, with chipmakers collectively shedding an estimated $US1 trillion in value. The Nasdaq Composite, heavily weighted towards technology stocks, led declines among major US indices. Shares of prominent chipmakers, including Micron Technology (MU), Advanced Micro Devices (AMD), and Intel (INTC), fell 4.10%, 5.73%, and 4.56% respectively. ASML (ASML) declined 3.94% despite raising its annual outlook amid strong AI-related demand. Trading Economics also highlighted supply constraints in semiconductor manufacturing equipment and improving capabilities among Chinese competitors. Concerns intensified over “neocloud” companies like CoreWeave (CRWV) and Nebius (NBIS), which plummeted 15.46% and 10.08% respectively. This followed a Gartner report predicting 80% of such providers would cease independent operations by 2030, citing insufficient revenue to support planned capital expenditures, alongside broader worries about financing risks and the use of debt to fuel the AI boom outside the “Magnificent Seven.”
Global Bond Market Pressures Mount
Treasury yields initially surged following the hotter-than-expected inflation report, with the 2-year yield jumping as much as 15.5 basis points and the 10-year yield rising 11.8 basis points intraday. However, selling pressure eased later in the session, with the 10-year yield reversing its gains to finish at 5.190%, down 2.70 basis points. Rate strategists warn of “more pain to come from the bond market” due to record debt issuance, excessive government spending, and stubborn inflation, which could push 10-year bond yields to 6%. The bond market rout has reportedly spread to global markets. Truist chief investment officer Keith Lerner noted that the risk-reward for bonds has improved after the sharp reset in yields.
Oil Market Volatility and Geopolitical Risks
Oil prices moved higher amid elevated supply disruption fears stemming from the ongoing conflict in Yemen, where Iran-backed Houthis reportedly targeted Saudi Aramco complexes in Dhahran and Riyadh, as well as the King Khalid International Airport. Consumers are currently paying an average of $4.33 a gallon for gasoline, up from $3.08 a year earlier. Despite President Donald Trump’s announcement to temporarily ease restrictions on Russian diesel fuel exports, analysts do not believe the deal will significantly lower fuel prices for consumers.
Stocks to Watch
Several individual stocks faced significant movements following the market shifts:
- Technology & Chipmakers: Alongside the broader sector downturn, NVIDIA (NVDA) fell 3.16%, Broadcom (AVGO) was down 3.10%, and Oracle (ORCL) declined 8.83% due to concerns about AI-related stocks.
- Neocloud Companies: CoreWeave (CRWV) bonds plunged into distress levels, reinforcing broader concerns.
- Financials: JPMorgan (JPM) shares rose 1.16% despite the bank reporting a surprise miss on quarterly profit estimates, while Goldman Sachs (GS) declined 1.48% after reporting a beat on quarterly estimates. Morgan Stanley‘s latest quarterly results topped expectations, though its stock ended the session 2.75% lower. BlackRock notched an increase in profit for the quarter, buoyed by an uptick in fees, with its stock rising 0.72%. Bank of America shares declined almost 5% after US regulators found evidence of compliance failures, leading to over $1.2 billion in federal penalties, and the bank missed revenue expectations.
- Other Corporate News: Netflix announced it would sack 6% of its workforce. The Fed’s Beige Book showed only two of the 12 Fed districts reporting moderate growth in economic activity. ASIC dropped its insider trading investigation into Richard White. Global banks are reportedly getting cold feet on Australian private credit funds.