'Nowhere to hide' for investors
The fall - which saw a further $20 billion wiped off the market - coincided with an extraordinary sell-off in Australian government bonds, with 10-year bond yields hitting a 15-month high.
Meanwhile, Chinese equity markets also witnessed their biggest daily loss in four years after diving 5.3 per cent in Shanghai and 6.7 per cent in Shenzhen. This followed Goldman Sachs cutting its forecasts for China's economic growth amid growing concern over bad loans.
On Monday, the benchmark S&P/ASX 200 Index fell 69.7 points to 4669.1. This means the index is only 20.2 points higher than where it started the year. The broader All Ordinaries Index lost 72.7 points, or 1.5 per cent, to 4651.1.
Last week, the US Federal Reserve signalled a possible end to its stimulus program, which has involved a multimillion-dollar bond-buying program. This caused 10-year US government bonds to spike - rising 14 per cent last week. A sell-off of Australian government debt saw yields soaring sharply.
Late last year, Australian government 10-year bonds hit record lows, mostly as offshore investors rushed into safe-haven assets. Now, the 10-year yield spread between Australian and US bonds has widened to an almost-two-month-high of about 140 basis points.
"This market move is quite unique," US interest rate strategist Andrew Lilley said. "In the past 10 large sell-offs in bonds, inflation expectations were rising quite significantly because the economic outlook was getting better. This sell-off is unique because 10-year inflation expectations in the US in the past six weeks have fallen about 0.5 per cent."
The spread between three and 10-year bonds reached about 100 basis points - its highest in about four years.
At the same time, financial markets lowered their expectations for a July rate cut in Australia, pricing in an 18 per cent chance of an easing next month.
Mr Lilley said investors appeared to be fleeing back into cash as the value of all assets - including commodities and gold - were falling at the same time.
The Australian dollar also slumped on Monday, falling below US92¢ for the first time since September, 2010. It was buying US91.59¢ late Monday, down from about US95¢ last week.
Deutsche Bank's head of fixed income David Plank said the higher bond yields were leading to lower equity prices, leaving investors with "nowhere to hide".
Lower bond yields had been helping to underpin the strength of equities and other assets. Materials and energy were the worst hit, with the sector down 3 per cent.
Fears about the state of China's banking sector has led some strategists to fear the country is now facing a credit bubble similar in dynamic to the US subprime crisis.
"There is a credit bubble in China that is now blowing up and no one knows who is exposed to who," Credit Suisse strategist Damian Boey said.
"It will take some time to figure that out and, until we do, the markets will keep slowing."
Mr Boey said the key issue was whether authorities could protect the core of banking system against the bad loans of the unofficial banking system.
"The answer is probably yes, but even still, it could be painful. Chinese industrial production growth could well be zero or negative, and if that happens, then there is no demand for our commodities."
Frequently Asked Questions about this Article…
The article says the sell-off was driven by the US Federal Reserve signalling a wind-back of its stimulus (reducing a large bond‑buying program) and growing fears of a Chinese credit crunch and bad loans. Those factors hit global sentiment, triggered a bond sell-off and pushed Australian equities lower.
According to the article, about $20 billion was wiped off the market that day. The S&P/ASX 200 fell 69.7 points to 4,669.1, while the All Ordinaries dropped 72.7 points (about 1.5%) to 4,651.1 — leaving the ASX only marginally higher than where it started the year.
The Fed’s hint of ending its bond‑buying program pushed US 10‑year yields up sharply (the article notes a 14% rise last week), and Australian 10‑year yields hit a 15‑month high. Higher bond yields reduce the appeal of equities and other assets, and Deutsche Bank warned that rising yields were contributing to lower equity prices — leaving investors with "nowhere to hide."
Chinese equity markets plunged (Shanghai down about 5.3% and Shenzhen about 6.7%), and Goldman Sachs trimmed its growth forecasts for China amid concerns over bad loans. The article reports strategists fearing a Chinese credit bubble, which could slow Chinese industrial production and reduce demand for commodities that matter to Australian exporters.
Materials and energy were the hardest hit, falling around 3% as reported in the article. Those sectors are sensitive to global commodity demand, so fears about a slowdown in China and falling commodity prices weighed heavily on them.
The Australian dollar slumped below US92 cents for the first time since September 2010, trading around US91.59c late on the day in the article. It had been about US95c the previous week, reflecting pressure from global market volatility and changing yield dynamics.
No — the article notes financial markets lowered their expectations for a July rate cut in Australia, pricing in only about an 18% chance of easing next month amid the recent market moves and rising bond yields.
The article reports investors appeared to be fleeing back into cash as the value of many assets — including equities, commodities and gold — were falling simultaneously. That reaction reflects concern about broad market weakness driven by rising yields and China‑related risks.
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