More than $60 billion was wiped from the Australian stockmarket on Wednesday in a broad sell-off triggered by economic woes in the US.

The ASX All Ordinaries Index finished the day down about 2.37 per cent, reversing four days of gains in the largest daily fall since early August.

It was bad news for investors and Australian superannuation balances, but the plunge was more muted than an earlier sell-off in US shares, which started the week with their worst trading day since June 2020.

Paper losses in the US ran into the hundreds of billions as markets were spooked by higher-than-anticipated inflation for the June quarter.

The inflation figures drove fears that the US Federal Reserve will pass through even higher interest rate hikes, RMIT associate professor Angel Zhong said.

“It’s a bloodbath everywhere in global sharemarkets,” she said.

“When inflation is higher than expected, market participants predict that the Fed will raise rates more quickly and significantly.”

US woes weigh on markets

Fears about an ongoing economic downturn in the US continue to weigh on local markets, with the world’s largest consumer economy acting as a bellwether of sorts for global financial sentiment.

“The inflation report dashed investor hopes that US policymakers may pivot or scale back its monetary policy tightening,” CommSec’s Ryan Felsman said.

“Following the upside inflation surprise, financial markets are now pricing in a jumbo interest rate hike of least 75-basis points, with a more than 30 per cent probability of a super-sized full percentage [point].”

Rate hikes are needed to curb soaring inflation in the US, Australia and elsewhere, but as Dr Zhong said, they sour the investor outlook.

“Interest rate hikes increase borrowing and operating costs for business, dampen spending among consumers and thus reduce future cashflows and profitability for business,” she said.

Such sell-offs eventually flow through to superannuation returns, especially if they’re sustained over an extended period of time.

Market outlook still robust

The good news is that the medium-term trajectory for local markets remains positive, and economists aren’t expecting inflation to rise as high as it has in the US.

BIS Oxford senior economist Sean Langcake said the prospect of an economic downturn in the US does have implications for Australia, but they are relatively minor compared to robust domestic conditions.

“In the US there are different circumstances. Their labour market is very tight and that’s generating faster wages growth than what’s happening here,” he said.

“That’s not something we’ve had to grapple with.”

Dr Zhong said Wednesday’s market sell-off won’t be sustained, noting research shows investors often over-react to inflation news.

“I don’t think the sell-off will be sustained in the long run,” she said.

“This sell-off follows four consecutive days of gains. We have also experienced similar sell-offs in the last few months, after which the market would recover over three to four days.”