Shares racked up their fourth week of losses in five, with the ASX hovering around seven-month lows as investors sought to integrate changing interest rate expectations into their stock choices.
The benchmark ended the day up 26 points, or 0.5 per cent, at 5682.10 in Friday's session, paring the weekly loss to 0.2 per cent as banks provided some upward momentum in the session. The Australian dollar fetched US79.45?? in late Friday trade after breaching US81?? early Thursday morning.
Financials had a positive week overall, gaining 0.8 per cent over the week, with the move helping to offset losses for rate-sensitive sectors such as utilities, down 2.2 per cent over the week, and real estate stocks, which fell 2 per cent.
CBA rose 0.5 per cent, Westpac climbed 0.6 per cent, Spark Infrastructure fell 1.6 per cent and Investa Office Fund lost 2.7 per cent.
Interest rates were the main focus for markets during the week, with ANZ economists saying they now expect the Reserve Bank of Australia to increase the cash rate by 50 basis points to 2 per cent over the course of 2018.
"We see high household leverage as a reason to modestly tighten rather than to leave the cash rate where it is," the economists said. "In saying this, we think the leverage in household balance sheets will be a constraint on how aggressive the RBA is."
Expectations for US interest rates also took a markedly hawkish turn this week following a meeting of Federal Reserve policymakers on Thursday morning that marked a symbolic historic end to 10 years of "easy money" as the Fed starts to wind back its balance sheet, bloated by years of bond buying.
"The underlying language of both the statement and 'dot plot' projections for the future path of rate hikes was clearly more hawkish than expected," Natixis Global Asset Management Chief Market Strategist David Lafferty said.
Australian markets were the global underperformers after the Fed meeting and that reflected fears of rate hikes in economies with diverging growth expectations, AMP Capital's Shane Oliver said.
"The market is worried that, if rate hikes occur in Australia, strength in cyclical stocks won't be able to offset losses in yield stocks because earnings growth is more constrained in Australia than in other economies," Mr Oliver said.
"In the US they have rate hikes but they also have strong profit growth. If the RBA raises rates, the worry is the negatives will outweigh the positives. I think those concerns are a bit overblown but I can understand why investors are concerned."
Rio Tinto rose 0.7 per cent on Friday after it said that it will buy back some more of its own shares and following a 5 per cent tumble in the price of iron ore on Thursday night. Peer BHP slipped 0.2 per cent and South32 rose 1.6 per cent.
Geopolitics are on the radar for investors as well, with renewed threats from North Korea on Friday and a couple of elections set to take place on the weekend. Germany is set to go to the polls on Sunday and New Zealand votes on Saturday.
Stockwatch
G8 Education
G8 Education shares rocketed 10.2 per cent over the week, with the firm signing a deal to buy 19 early education and childcare centres for $27 million. Six of the centres are in Queensland, five are in New South Wales and eight are in Victoria. G8 managing director Gary Carroll said the acquisitions represented "a positive opportunity" for the firm to grow and that the purchases were expected to contribute approximately $1m in earnings before interest and tax in fiscal 2017. Canaccord Genuity analyst Aaron Muller upgraded his recommendation on G8 to "buy" from "hold" after the deal and raised his target price to $4.45 from $4.04, implying a 13 per cent increase from the last close. Deutsche Bank's Stuart McLachlan said he viewed G8's acquisition "positively, given it's earnings per share accretive and demonstrates continued acquisition pricing discipline". "The acquisition also provides earnings support in the event GEM is unable to improve occupancy trends in the short term," Mr McLachlan said.
Movers
Hong Kong cut
S&P Global Ratings cut Hong Kong's credit rating on Friday, a day after it downgraded China for the first time since 1999, a move that reflects the "strong institutional and political linkages" between the special administrative region and the mainland, the ratings firm said. The financial hub's long-term issuer credit rating was lowered to AA+ from AAA, S&P said. The agency lowered China's sovereign rating Thursday to A+ from AA-, citing the risks from soaring debt, and revised its outlook to stable from negative. "We are lowering the rating on Hong Kong to reflect potential spillover risks to the SAR should deleveraging in China prove to be more disruptive than we currently expect," S&P said in a statement, referring to the Hong Kong special administrative region.
Iron ore woes
Fortescue Metals Group dropped 7.8 per cent over the week after the iron ore miner suffered along with the iron ore price. Iron ore dropped 8.4 per cent over the week and 3 per cent the week before. Ahead of China's 19th Congress of the Chinese Communist Party next month, the Reserve Bank of Australia called the top of the iron ore cycle on Tuesday when it released the minutes from its last interest rate meeting. Officials at the bank said that China's production of steel was likely to ease from here on while supply of the raw material would keep increasing.
Precious juniors
Junior gold miners also had a bad week, with St. Barbara down 11 per cent and Resolute Mining down 9.3 per cent, and Evolution Mining 7.5 per cent lower, with the gold price set for its second straight weekly decline. The metal is highly sensitive to rising US interest rates, which boost the cost of holding non-yielding bullion relative to other assets, while lifting the dollar, in which it is priced. On Thursday, the Federal Reserve signalled it was on track to raise US interest rates again in December. Not even renewed tensions on the Korean Peninsular could shift gold from weekly losses. "It appears there is some concern among market participants about these comments, but they are discounted somewhat given past examples of bluster between these protagonists," NAB economist John Sharma said.
Sterling surprise
BT Investment Management and CYBG had a good week, rising 7 per cent and 5.2 per cent, respectively, as traders continued to rejig expectations for UK interest rates after hawkish noises from Bank of England members late last week. The pound is at $US1.3591, after leaping last week to the highest level it has traded since the UK voted to leave the European Union in June 2016. The pound plunged from $US1.50 in June 2016 as the result of the vote become clear. The hawkish noises from the Bank of England have given investors cause to snap up UK-focused money managers, given they generate a significant portion of revenue in the UK.