Target’s nightmare on Wall Street sends Aussie investors to exit

Neale Prior and Derek RoseAAP
The Australian exchange is expected to follow the US lower after Wall Street indices lost up to four per cent of their value overnight.
Camera IconThe Australian exchange is expected to follow the US lower after Wall Street indices lost up to four per cent of their value overnight. Credit: Mogens Johansen/The West Australian

Surging inflation fears are driving Australian shares lower after Wall Street endured one of its toughest nights in two years.

Fears of shipping costs eating into global profits were stoked by the US retailer Target revealing its operating margin more than one-third below expectations.

And Target losing more than one-quarter of its value overnight Wednesday not only hit sentiment on Wall Street, it contributed to the board S&P 500 index plunging more than 4 per cent — it’s biggest loss since June 2020.

With Walmart continuing to plunge after having released an earnings downgrade overnight Tuesday, analyst said there was increasing fear that revenue and earnings were going to be hit by more interest rate hikes to counter inflation.

“Retailers are starting to reveal the impact of eroding consumer purchasing power,” Well Fargo global strategy chief Paul Christopher said.

That worry has been taken up by Australian investors in early trade this morning with big ticket consumer discretionary stocks JB Hi-Fi, Wesfarmers and Woolworths all plunging around 6 per cent. Coles, labelled a consumer staples stock, was down almost 4 per cent.

Rebel Sport, Supercheap Auto and Macpac owner Super Retail Group dropped by 5.8 per cent to a one-year low, Myer was down by 3.5 per cent to a two-month low and City Chic Collective dropped by 6.5 per cent.

Consumer staples stocks were also battered, with the sector down 4.1 per cent.

The negative reports out of the US add to fears that Australia will cop another interest rate hike next month regardless of who wins the Federal election.

The big question among economists is the size of the rate rise as politicians and central bankers juggle the competing pressure of containing inflation while limiting the erosion of real wages.

Commsec chief economist Craig James said wages not keeping up with inflation was a global problem.

After being down around 1.8 per cent in early trade, the S&P-ASX 200 index had recovered marginally to be done 1.6 per cent mid-morning.

Big ticket iron ore miners were battered by the subdued global outlook, with Rio Tinto down almost 2.8 per cent, Fortescue Metals Group down 2.6 per cent and BHP down 2 per cent.

Woodside shares were down almost 2.5 per cent to $29.98 ahead of a crucial vote at Thursday’s annual general meeting where investors will decide on the fate of a $41 billion tie up with BHP’s oil and gas assets.

All sectors save healthcare, which was buoyed by CSL, were in the red.

The big banks were all lower, with Westpac falling four per cent to $23.46, while ANZ and CBA were both down more than one per cent.

Gold miners were a rare bright spot on the market, with Northern Star and Evolution both up 1.8 per cent, and Newcrest rising 0.2 per cent.

Aristocrat Leisure rose 4.9 per cent to $33.15 after the gaming company said it would begin a $500 million share buy-back program next month.

Wall Street slumps as growth stocks sink

Wall Street has ended sharply lower, with Target losing around a quarter of its stock market value and highlighting worries about the US economy after the retailer became the latest victim of surging prices.

It was the worst one-day loss for the S&P 500 since June 2020.

Target Corp’s first-quarter profit fell by half and the company warned of a bigger margin hit on rising fuel and freight costs.

Its shares fell more than 25 per cent in their worst session since the Black Monday crash on October 19, 1987.

The retailer’s results come a day after rival Walmart Inc trimmed its profit forecast.

“We think the developing impact on retail spending as inflation outpaces wages for even longer than people might have expected is a principal factor in causing the market sell-off today,” said Paul Christopher, head of global market strategy at Wells Fargo Investment Institute.

“Retailers are starting to reveal the impact of eroding consumer purchasing power.”

Interest-rate sensitive megacap growth stocks added to recent declines and pulled the S&P 500 and Nasdaq lower.

Tesla Inc, Nvidia, Amazon, Apple and Microsoft all fell sharply.

“The cons outweigh the pros for growth stocks at this particular moment, and the market is trying to decide how bad it’s going to get,” said Liz Young, head of investment strategy at SoFi.

“The market is fearful of the next six months. We may find out that it doesn’t need to be as fearful as this, and markets do tend to overreact on the downside.”

All of the 11 S&P 500 sector indexes declined, with consumer discretionary and consumer staples leading the way lower.

Rising inflation, the conflict in Ukraine, prolonged supply chain snarls, pandemic-related lockdowns in China and monetary policy tightening by central banks have weighed on financial markets recently, stoking concerns about a global economic slowdown.

Wells Fargo Investment Institute on Wednesday said it expects a mild US recession at the end of 2022 and early 2023.

Federal Reserve Chair Jerome Powell vowed on Tuesday that the US central bank will raise rates as high as needed to kill a surge in inflation that he said threatened the foundation of the economy.

Traders are pricing in 50-basis point interest rate hikes by the Fed in June and July.

The S&P 500 lost 163.59 points, or 4.00 per cent, to end at 3,925.18 points, while the Nasdaq Composite lost 561.50 points, or 4.69 per cent, to 11,423.03 and the Dow Jones Industrial Average fell 1,148.11 points, or 3.52 per cent, to 31,506.48.

The S&P 500 is down about 17 per cent so far in 2022 and the Nasdaq has fallen about 27 per cent, hit by tumbling growth stocks.

Wall Street’s recent sell-off has left the S&P 500 trading at about 17 times expected earnings, its lowest PE valuation since the 2020 sell-off caused by the coronavirus pandemic, according to Refinitiv data.

The CBOE volatility index, also known as Wall Street’s fear gauge, rose to 31 points after falling for six straight sessions.

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