Well, what a shocking day it was for the ASX share market this Wednesday. After two days of healthy gains, ASX investors were probably not quite prepared for what lay in store for this trading session.
The ASX 200 S&P/ASX 200 Index (ASX: XJO) ended up closing at 6,828.6 points, down a painful 2.58% from yesterday. This wiped around $60 billion from the value of the share market. Remember, yesterday saw the ASX 200 cross back over 7,000 points for the first time this month. It wasn't to last.
It wasn't much better for the All Ordinaries Index (ASX: XAO) either. The ASX's oldest index closed the day at 7,071.8 points, down by 2.51%.
It was the worst day for ASX shares in at least three months, wiping around $60 billion from the value of the share market. The ASX 200 opened at 7,008.2 points this morning but quickly plunged. The index hit a low of 6,808.6 points before closing at just above that figure at 6,828.6 points.
We saw massive falls from the ASX banks, including Commonwealth Bank of Australia (ASX: CBA). CBA shares dropped a nasty 3.55%.
Miners like BHP Group Ltd (ASX: BHP) also fell, but regained at least some of their value in late trading. BHP was down 2.24% at one stage but recovered to end the day down 'only' 1.78%. As the largest share on the ASX 200, this saved the index from an even more brutal drop overall.
So what on earth happened to induce such a bloodbath on the share market?
Well, in one word? Inflation.
Inflation fears wipe $60 billion from ASX 200 shares
Last night (our time), the latest inflation numbers came out from the United States. As our chief investment officer Scott Phillips discussed this morning, most commentators were expecting a mild fall in American inflation, given the falling oil prices we've seen in recent months.
But the US economy had a surprise in store. Despite lower fuel costs, US inflation actually rose by 0.1% to an annualised rate of 8.3%. As Bruce Jackson described it this morning, "inflation is raging out of control". For investors, this only means one thing: higher interest rates. Both the US Federal Reserve and our own Reserve Bank of Australia (RBA) have been aggressively hiking rates for most of the year so far.
But investors seemed to be hoping that the US Fed might consider easing off the pedal if the inflation figures showed inflation slowing, as they were expected to. But alas, it was not to be, and many commentators are now expecting the Fed to keep hiking.
Unsurprisingly, US markets were also hammered overnight, which was always going to make things difficult for ASX shares.
Higher interest rates are bad news for shares and for most assets such as housing. Higher rates encourage investors to avoid 'risky' investments like shares in favour of safer investments like cash. Further, they also force many investors to change the valuation models used to determine what a company is worth. And not in a good way.
Adding to all of this are concerns that the aggressive path inflation might now force the Fed onto could tip the US (and thus, most of the world) into another recession.
So this hurricane of bad news was almost certainly behind the horrible day ASX shares and the ASX 200 Index had this Wednesday. No doubt, investors will be hoping for a brighter end to the week.
