Energy stocks decline as Wall Street rate concerns weigh on ASX

By Sumeyya Ilanbey
Updated

The energy sector drove stocks lower on the Australian sharemarket, following losses on Wall Street where hawkish comments by a Fed official spoiled investors’ optimism for quick and sharp rate cuts this year.

The S&P/ASX200 fell 14.9 points, or 0.2 per cent, to 7399.9 about 12.35pm AEDT, with only four out of the 11 sectors trading in the green. Utilities (up 0.62 per cent) was the strongest performing sector, while energy (down 1.35 per cent) was the weakest.

Wall Street is hovering near record highs.
Wall Street is hovering near record highs.Credit: Bloomberg

At midday, Mercury NZ had recorded the greatest advance among large-cap stocks, its shares up 2.91 per cent, followed by Boral (up 1.91 per cent) and Aristocrat Leisure (up 1.24 per cent).

Although the mining sector declined 0.23 per cent, iron ore heavyweights BHP (up 0.65 per cent), Fortescue (up 1.09 per cent) and Rio Tinto (up 1.18 per cent) were all trading higher after the price of the steel-making ingredient lifted 1.5 per cent to $US129.35.

Shares in Evolution Mining crashed 18 per cent after the company released its December quarter performance, revealing that while its gold operations had improved there were fresh problems at the company’s Red Lake mine in Canada. Evolution produced 161,073 ounces of gold in the December period at an average all-in-sustaining cost of $US1618 an ounce, with production up 2 per cent compared to the September period.

Shares in gold miners Newmont fell 4.36 per cent and Northern Star Resources dropped 4 per cent after the price of spot gold slipped 1.6 per cent to $US2024.41 an ounce.

The energy sector slumped as a strong US dollar made oil more expensive for overseas buyers, offsetting concerns over the escalation tensions in the Red Sea. Brent crude fell 0.2 per cent to $US77.99 a barrel.

Heavyweights Woodside (down 1.64 per cent), Santos (down 1.3 per cent), Ampol (down 0.55 per cent), Whitehaven Coal (down 1.68 per cent) and Viva Energy Group (down 0.44 per cent) all fell.

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The Australian dollar slumped 1.2 per cent, falling below US66 cents as the greenback advanced against other major currencies.

Meanwhile, former Victorian premier Jeff Kennett resigned as Coles’ independent arbiter after almost a decade in the role. He will be replaced by Jenny Linsten, who has been a lawyer at Clayton Utz and general counsel of the Ford Motor Company of Australia, on February 15.

Overnight, the S&P 500 fell 0.4 per cent, the Dow Jones dropped 0.6 per cent and the Nasdaq composite sank 0.2 per cent. Yields swung in the bond market and the US dollar jumped after Fed Governor Christopher Waller cautioned in a speech that “policy is set properly” on US interest rates.

Spirit Airlines lost 47.1 per cent after a US judge blocked its takeover by JetBlue Airways on concerns it would mean higher airfares for flyers. JetBlue rose 4.9 per cent.

Stocks of banks were mixed, meanwhile, as earnings reporting season ramps up for the final three months of 2023. Morgan Stanley sank 4.2 per cent after it said a legal matter and a special assessment knocked $US535 million ($813 million) off its pretax earnings, while Goldman Sachs edged 0.7 per cent higher after reporting results that topped Wall Street’s forecasts.

Companies across the S&P 500 are likely to report meagre growth in profits for the fourth quarter from a year earlier, if any, if Wall Street analysts’ forecasts are to be believed. Earnings have been under pressure for more than a year because of rising costs amid high inflation.

But optimism is higher for 2024, where analysts are forecasting a strong 11.8 per cent growth in earnings per share for S&P 500 companies, according to FactSet. That, plus expectations for several cuts to interest rates by the Federal Reserve this year, have helped the S&P 500 rally to 10 winning weeks in the last 11. The index remains within 0.6 per cent of its all-time high set two years ago.

Treasury yields have already sunk in the bond market on expectations for upcoming cuts to rates, which traders believe could begin as early as March. It’s a sharp turnaround from the past couple years, when the Federal Reserve was hiking rates drastically in hopes of getting high inflation under control.

Easier rates and yields relax the pressure on the economy and financial system, while also boosting prices for investments. And for the past six months, interest rates have been the main force moving the stock market, according to Michael Wilson, strategist at Morgan Stanley.

He sees that dynamic continuing in the near term, with the “bond market still in charge.”

For now, traders are penciling in many more cuts to rates through 2024 than the Fed itself has indicated. That raises the potential for big market swings around each speech by a Fed official or economic report.

Fed Reserve Board member Waller said cooling data reports have “made me more confident than I have been since 2021 that inflation is on a path” down to the Fed’s 2 per cent target and that the central bank should cut rates this year “as long as inflation doesn’t rebound and stay elevated.”

Until then, though, Waller said the economy is doing well, which gives the Fed the ability to wait and monitor incoming data before making its next move.

“We can take our time to make sure we do this right,” Waller said, spoiling market expectations of 150 basis points in cuts to the cash rate this year.

The yield on the 10-year Treasury climbed to 4.06 per cent from 3.95 per cent late Friday to add pressure on the stock market. Higher yields can drag on corporate profits, among other negatives for investors, though the 10-year yield is still well below the 5 per cent level it reached in October.

On Wall Street, Boeing fell to one of the market’s sharper losses as worries continue about troubles for its 737 Max 9 aircraft following the recent in-flight blowout of an Alaska Airlines jet. Boeing lost 7.9 per cent.

On the winning side was Carrols Restaurant Group, the largest Burger King franchisee in the US, which jumped 12.5 per cent. Restaurant Brands International said it will buy all the stock of Carrols that it doesn’t already own for $US9.55 per share in cash.

Stock markets abroad were mostly lower, including Japan’s, which had been on a winning streak that had carried it to its highest level since its bubble was deflating in 1990.

The Nikkei 225 index slipped 0.8 per cent after the value of the Japanese yen strengthened against other currencies. A stronger yen can sap profits for Japanese exporters, and it rose with expectations that the Bank of Japan could be preparing to end its longstanding policy to keep interest rates below zero.

with AP

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