Note from the MD: Inflation shock sends Wall Street, ASX tumbling

The domestic market opened down more than 2.5% from last night’s close, before clawing back initial losses to be down 2.37% by mid afternoon. The Australian dollar followed suit, down 2.26% to near 52-week lows.

The domestic market opened down more than 2.5% from last night’s close, before clawing back initial losses to be down 2.37% by mid afternoon. The Australian dollar followed suit, down 2.26% to near 52-week lows.

A shock 0.6% jump in core US consumer prices crushed hopes inflation there had peaked and saw investors price in a real chance the Federal Reserve could hike rates by a full percentage point next week.

Markets read that as an omen for domestic policy and revived wagers the Reserve Bank of Australia (RBA) could hike by 50 basis points to 2.85% at its October meeting.

Australian consumer sentiment jumped 3.9% month-over-month in September, though, reversing from a 3% fall in August and rising for the first time since November 2021, data from the Westpac-Melbourne Institute Index shows.

Elsewhere in domestic markets, Star Entertainment has rallied Tuesday after entering a trading halt earlier in the week due to a report released by senior counsel Adam Bell for the Independent Liquor and Gaming Authority of NSW.

Star has two weeks to show cause why it should not lose its lucrative NSW casino licence or face up to a $100 million fine due to the critical evaluation of Star’s governance, risk management and cultural failures.

What was shaping up as the biggest M&A deal of 2022 – KKR-led consortium to buy Ramsay Health Care – has fallen through, leading to a fall of over 10% on market close Tuesday. It is understood the buyer syndicate put an end to talks.

With KKR unwilling to lift its bid, and Ramsay’s board not softening from its earlier calls, the offer has gone cold. The deal would have valued Ramsay at $14.5 billion.

Global markets have fallen sharply overnight on the news that the US Labor Department’s consumer price index (CPI) came in above market expectations.

Core CPI, which strips out food and energy prices, increased more than expected, rising to 6.3% in August from 5.9% in July.

Although overall inflation seemed to have rolled off from the 9.1% peak in June, these drops have been driven by the decline in commodity prices. The core CPI has been steadily rising, driven by labour shortages and higher labour costs, significant increases in rents and housing.

The surprise to the upside indicates that inflation is still sticky and not rolling over as easily, forcing a stronger response from the US Federal Reserve in the coming months. 

What this means for the world and Australia, as the Fed keeps raising rates at the expense of the markets, is being led into a slowdown in economic growth and less demand for goods and services. As an exporting nation, Australia is directly affected as other countries’ demand drops. 

The XJO has traded up for the past four sessions and broken through the 50-day moving average and is trading higher, testing the 200-day moving average. 

Implied volatility has fallen slightly from last week, where it is now at 14.36% and an IV rank of 25. It would be expected that we could see a large move up in volatility with any move down in share price.

XJO’s low IV rank sets investors up to buy some relatively cheap insurance on their portfolio to hedge for any future moves down. 

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Reach Corporate provides corporate advisory services to WNX and has been engaged by WNX to manage its investor communications.

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