ASX Defies Wall Street Inflation Shock as Bond Yields Climb

Australian equities: what moved the ASX 200?

Australian shares demonstrated resilience on Wednesday, with the S&P/ASX 200 closing at 9,153.2, gaining approximately 24.2 points or 0.27%. The benchmark recovered from an early decline to finish near its session high, reaching its highest level in 11 weeks despite a weaker lead from Wall Street.

The performance was notable given the overnight sell-off in US equities. Australian shares found support as regional markets improved and US equity futures strengthened during the local session. However, the relatively modest gain suggests market participants remain selective rather than embracing a broad-based rally.

The domestic economic backdrop remains challenging. Australia's unemployment rate reached 4.7% in September, while the Reserve Bank of Australia increased its cash rate by 25 basis points to 4.85% on 3 November, effective the following day. The combination of slower employment growth and persistent inflation creates a difficult environment for companies exposed to household spending, property and borrowing costs.

The Australian dollar, bonds and the RBA

The Australian dollar remained sensitive to movements in the US dollar and changing interest rate expectations. The latest US inflation figures strengthened expectations of further Federal Reserve tightening, potentially limiting the Australian dollar's ability to recover.

Australian bond yields remain an important variable for the domestic sharemarket. With the RBA's cash rate at 4.85%, borrowing costs are elevated, increasing pressure on highly leveraged businesses, property valuations and consumer spending.

The RBA's November outlook indicates that inflation is likely to remain above its 2–3% target range for longer than previously anticipated, with inflation not expected to return to the midpoint until around mid-2028. This reinforces the possibility that restrictive monetary policy will remain in place for an extended period.

Global markets: China, Asia and Europe

Asian markets were generally stronger on Wednesday, although performance varied considerably. Japan's Nikkei 225 advanced 0.87% to 60,987.90, while South Korea's Kospi gained 0.68% to 5,274.98. Taiwan's Taiex also advanced 0.56% to 42,951.20.

Mainland Chinese equities edged higher, with the Shanghai Composite gaining 0.40% to 3,663.72. Hong Kong was the regional exception, with the Hang Seng declining 0.83% to 24,354.19.

The divergence highlights the continuing difference between enthusiasm for technology and semiconductor businesses and uncertainty surrounding China's domestic economic recovery. For Australia, the critical question remains whether Chinese industrial demand can improve sufficiently to support bulk commodity exports, particularly iron ore and copper.

European markets finished Tuesday mostly higher. Germany's DAX gained 0.31%, France's CAC 40 advanced 0.55% and London's FTSE 100 declined 0.29%. The European session preceded the latest US inflation-driven market reaction.

Wall Street: US stocks and the Federal Reserve

Wall Street finished lower on Tuesday as October inflation figures reinforced concerns that the Federal Reserve may need to maintain restrictive monetary policy for longer.

The S&P 500 declined 0.38% to 7,520.93, the Nasdaq Composite fell 0.74% to 25,065.87 and the Dow Jones Industrial Average slipped 0.30% to 52,231.89. The Russell 2000 also lost 0.69%, closing at 2,821.38.

US consumer prices increased 0.4% in October, exceeding the 0.3% monthly increase economists had expected. This followed September's 0.6% increase, highlighting the persistence of inflationary pressures.

Technology shares were particularly weak. Nvidia fell 5.4%, taking its two-session decline to 9.6%, amid concerns surrounding its chief executive and an internal investigation into allegations involving Chinese chip shipments. The broader semiconductor index also declined, although by a more modest 0.4%.

Bond markets reacted sharply. The US two-year Treasury yield climbed approximately 18.9 basis points to 4.736%, reflecting expectations of further Federal Reserve tightening. Markets fully priced in at least a 25-basis-point rate increase at the December meeting, while expectations of a larger 50-basis-point increase also emerged.

We believe this presents a growing challenge for equity valuations. Strong technology earnings and artificial intelligence investment continue to support the longer-term growth narrative, but rising borrowing costs make elevated valuations increasingly difficult to justify.

Commodities: gold, oil and industrial metals

Commodity markets experienced considerable volatility following Tuesday's movements. Gold recovered towards US$4,053 an ounce during Wednesday's Asian trading, gaining approximately 0.6% from its previous settlement. The recovery suggests buying interest remains present, although higher Treasury yields and a stronger US dollar continue to create headwinds.

Brent crude traded around US$91.88 a barrel, while West Texas Intermediate was near US$86.19. Copper recovered to approximately US$6.30 a pound, gaining around 1% during the Asian session.

The recovery in industrial metals provides some support for Australian producers, although Chinese demand remains the critical variable. For mining businesses, commodity prices must also be considered alongside production costs, operating volumes, exchange rates and capital expenditure.

What to watch next

The immediate focus is whether US bond yields continue climbing and whether the latest inflation figures translate into a more aggressive Federal Reserve policy outlook. This could influence global equity valuations, technology shares and the Australian dollar.

Domestically, Australia's October employment report on 19 November will provide another important indication of labour market conditions. The RBA's next monetary policy decision is scheduled for 8 December, with inflation and employment developments likely to shape expectations ahead of that meeting.

Our assessment is that the Australian sharemarket remains relatively resilient, but the global environment is becoming more demanding. Strong corporate earnings and technology investment provide support, while persistent inflation and elevated borrowing costs threaten valuations. The key question is whether earnings growth can continue to justify current market levels if central banks are forced to keep interest rates higher for longer.