Sharemarket drops as investors fret over outlook for higher interest rates

Wednesday, 19 January 2022

The sharemarket followed overseas markets lower as investors fretted over the outlook for higher interest rates.

The benchmark S&P/NZX50 Index dropped 1.6 per cent, or 202.146 points, to 12,612.31 on Wednesday.

Stocks fell to a new low for the year on Wall Street on Tuesday and bond yields surged amid renewed jitters the Federal Reserve will lift interest rates to tackle rising inflation.

The S&P 500 fell 1.8 per cent, with about 90 per cent of the stocks in the benchmark index closing in the red. The Nasdaq slid 2.6 per cent, while the Dow Jones Industrial Average fell 1.5 per cent.

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The New Zealand market followed Wall Street lower amid growing expectations for aggressive interest rate hikes in the United States.

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“The New Zealand market has copped it today,” said Harbour Asset Management portfolio manager Shane Solly.

“The lead came from a very weak US market overnight where people have been anxious about the impact of higher interest rates,” Solly said. “There’s quite a lot of interest rate increases priced into the market now, with four or potentially even five rate hikes from the US Federal Reserve which is quite aggressive.”

Investors are trying to predict how much the Fed will raise interest rates, and how fast. The central bank has hastened its plan to trim bond purchases and is considering raising interest rates earlier and more often than Wall Street had expected.

Investors are now pricing in a better than 86 per cent probability that the Fed will raise short-term rates at its meeting of policymakers in March. A month ago, they saw less than a 47 per cent chance of that, according to CME Group.

The Fed is under pressure to curtail inflation, which jumped last month at its fastest pace in nearly 40 years. At the same time, the job market has bounced back from last year's brief but intense coronavirus recession, leaving the US unemployment rate last month at a pandemic low 3.9 per cent, giving the central bank more leeway to rein in the unprecedented support it's been providing the economy since the pandemic struck.

While higher rates could help stem the high inflation sweeping the world, they would also mark an end to the conditions that have put financial markets in “easy mode” for many investors since early 2020.

“Markets have moved very quickly to factor in these higher rates,” Solly said.

Higher rates make shares in high-flying tech companies and other expensive growth stocks less attractive.

On the local bourse, the interest rate outlook is weighing on higher growth stocks such as Fisher & Paykel Healthcare, the biggest stock on the market, which fell 3.2 per cent to $30.40. Fisher & Paykel earlier touched an intra-day low of $30.30, its weakest price since October last year.

Electricity generator and distributor companies, which had been resilient even as long-term bond yields rose, were now also coming under pressure, Solly said.

Meridian Energy fell 1.3 per cent to $4.61, while Contact Energy dropped 2.5 per cent to $7.86. Genesis Energy bucked the trend, edging up 0.3 per cent to $2.93.

Elsewhere, Asian shares generally fell in cautious trading on Wednesday, with Tokyo, Shanghai, Seoul and Sydney lower while Hong Kong edged higher.

- With AP