ASX 200 plummets after Fed hints at end of stimulus

The day after the Reserve Bank of Australia (RBA) dropped interest rates to a record low of 2.5%, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) suffered its worst day of trading in over seven weeks.

Yesterday, the index plummeted to as low as 5,007.9 points before finishing the day at 5,011.3 – a 1.8% drop – lead down by major sectors such as materials, industrials and financials. For instance, BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) both lost in excess of 2% and Fortescue Metals Group (ASX: FMG) dropped 4.6%. Meanwhile, Westpac (ASX: WBC) was the worst performer out of the major banks with a 2.24% drop, whilst each of its competitors fell between 1.71% and 2.22%.

The falls across the market followed weak trading periods overnight in the US and China, as speculation heightened that the US Federal Reserve could begin to taper off its stimulus program as soon as next month – offset by strong trade figures and comments made by the Fed’s officials.

Furthermore, a report which revealed that home loan approvals for the month of June had increased by 2.7% would have also exacerbated the sell-off according to Ric Spooner, CMC Markets’ chief market analyst. He said “it may have got some people thinking ongoing and continued strength in the housing sector may be something that makes our central bank think a bit about whether further rate cuts are appropriate.”

Foolish takeaway

Many of the defensive, high-yielding stocks have delivered extraordinary returns over the last 12 months with both local and foreign investors seeking higher returns than those guaranteed in term deposits or savings accounts. As interest rates have been continuously slashed, investments in these shares have soared. However, with signs that these cuts may have come to an end, it seems that companies will need to rely more-so on impressive earnings reports as opposed to offering high yields to increase in value.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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