The Australian stock market suffered a dramatic fall on Monday as investors reacted to a spike in US bond yields on Friday.
Better-than-expected employment data released by the US Bureau of Labor Statistics on Friday caused US 10-year Treasury yields to rise sharply, reflecting fears about inflation.
US 10-year yields hit 2.86 per cent by the close of trading on Friday, up from 2.4 per cent in early January – largely driven by the perception that wage inflation is starting to take root, which could result in faster rate hikes by the US Federal Reserve.
The corresponding fall in bond prices (which move inversely to yields) carried over to the US stock market on Friday, with the S&P 500 down 3.8 per cent.
In Australia, the ASX 200 lost 1.6 per cent by the close of trading on Monday afternoon – the largest single-day fall since September 2016.
Investors Mutual Limited investment director Anton Tagliaferro said the share market correction is "well overdue".
"It is highly unlikely that we will see the same gains on overseas markets that we saw in 2017," Mr Tagliaferro said.
"While sharemarkets will likely rebound at some point, we believe it is likely that the combination of high valuations for many sectors as well as rising bond yields will lead to significantly increased volatility in sharemarkets over 2018.
"We expect the correction in Australia will be mainly felt in high flying areas like the resources sector as well as many lower quality smaller companies where we have seen excessive speculation.
"While rates in the US may increase further in 2018, we believe the RBA will keep Australian interest rates on hold for some time yet given the high leverage of Australian consumers as well as the continued strength in the Australia dollar against the US dollar."
AMP Capital chief economist Shane Oliver said that while the market has priced in two or three rate hikes by the US Federal Reserve throughout 2018, he is expecting four or even five.
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