Australian shares are heading lower as interest rate hike concerns loom

Australian shares ended a choppy session marginally lower on Wednesday as gains in the mining sector failed to offset broader losses, fueled by caution over the prospects for longer yields and the upcoming US interest rate decision. The S&P/ASX 200 index fell 0.08% to 8,579.40 points. Yields closed 0.5% lower on Tuesday after the Reserve Bank of Australia signaled the easing cycle is over and flagged the possibility of a rate hike if inflation remains high.

Swaps now imply a 30% probability of a quarter-point increase in cash rates at the RBA’s next meeting in February, and an almost 100% probability in May.Most stock market sectors ended in the red as investors cautiously maintained their positions ahead of the US Federal Reserve meeting, which could revise policy expectations for the coming year, said Hebe Chen, market analyst at Vantage Markets.

The financial sector, which has among the highest valuations globally, was the biggest drag, down 0.4%. Top lender Commonwealth Bank of Australia fell 0.5%.

“Large banks may enjoy near-term margin support if both interest rates and credit demand hold steady, but upside potential is likely to be limited by credit quality concerns, household stress and sluggish real estate prices,” Chen said.

Real estate stocks fell 0.7%, while industrial and technology stocks fell 0.8% and 1.5%, respectively. A possible rate hike from the RBA as early as February will cast a long shadow over rate-sensitive sectors such as real estate and growth tech, where earnings and valuations remain exposed, Chen added.

Meanwhile, miners broke off two losing sessions to add 1.5%. Sector heads BHP, Rio Tinto and Fortescue rose between 0.3% and 0.9%, helped by a rebound in iron ore prices after stronger-than-expected inflation in top consumer China revived stimulus hopes.

Gold stocks rose 4.1% in their best session in two months on higher bullion prices.

New Zealand’s S&P/NZX 50 index fell 0.6% to 13,371.06 points.