Investors are bracing for a global bond market upheaval to impact Australian share market valuations, as a sharp increase in oil prices fuels concerns of aggressive Reserve Bank action. Government bond yields surged overnight, reaching multi-year highs after escalating Middle East hostilities pushed Brent crude towards US$110 a barrel. This global trend quickly translated to Australia, with traders significantly increasing bets on a Reserve Bank of Australia (RBA) interest rate hike later this month, driving local bond yields to levels not seen since May 2011. The S&P/ASX 200 responded by tumbling a further 1 per cent at Friday’s open, extending its weekly decline past 3 per cent.
Australian bond yields reflected this heightened pressure, with the three-year bond yield surging to 5.04 per cent and the 10-year yield hitting 5.37 per cent. Bell Potter’s director of institutional sales and trading, Richard Coppleson, warned that “An RBA hike will hurt the consumer at a time when the Australian economy is looking weak, and the chances of a recession are increasing by the day.” Analysts have already revised down ASX 200 profit forecasts for the current financial year to approximately 9 per cent, a notable drop from nearly 13 per cent just two months prior. The local sharemarket’s underperformance, up only 0.3 per cent this year, stands in stark contrast to most developed markets.
Market expectations now imply a 78 per cent chance the RBA will lift the cash rate to 4.6 per cent this month. Citi anticipates two more RBA rate rises this year, citing Australia’s “two-speed economy,” where a housing market correction occurs alongside an investment boom. The broker predicts a 10 per cent national house price fall from their peak by early next year, impacting the ASX’s heavyweight banking sector, with Commonwealth Bank shares notably down. Martin Conlon, head of Schroders’ Australian equities division, warned that the bond market signals a need to constrain current conditions, stating, “valuations are pretty full, so it’s time for a bit of caution” in equity markets.
