Coming off a mid-week break, the ASX was standing tall with its chest out at the opening bell today — edging back above 7,000 following three straight losing sessions.

Fast forward to 2pm EST, and local stocks were again keeled over in the fetal position following another stomach punch — this time breaking below the 6,900 support level with another +1% fall.

Gold stocks got smashed, alongside another brutal selloff for tech.

And aside from more healthy gains for some lucky junior explorers, the ASX Energy index was one of the few sectors to outperform as oil prices stay elevated.

So what happened?

To try and make sense of the move, Stockhead got a quick scoop from Kyle Rodda — Australian market analyst at trading platform

For Rodda, it wasn’t a specific catalyst that sparked the reversal.

Rather, it reflected the increasing skittishness among investors as global financial conditions continue to tighten.

It means more volatility, and intraday rollercoasters — unusual in the post-COVID era — may become more commonplace.

All roads lead to the Fed

Along with tighter monetary policy, geopolitical risk is back on the cards with news today that Russia has called back its diplomats from the US amid ongoing tensions over Ukraine.

But Rodda said this bout of market volatility largely ties back to one shift.

“If I had to break it down, I’d say it’s 90% about the US Fed and central bank policy, 5% about growth and profits, and 5% geopolitical uncertainty,” he told Stockhead.

“The key issue really is Fed policy.”

Overnight, US Fed chair Jerome Powell made it clear the Fed plans to raise rates multiple times this year — starting in March.

In central banking, what the Fed does is often a catalyst for other central banks to change course.

And increasingly, markets are pricing for RBA rate hikes this year as well after Australia got a hot inflation print of its own earlier this week.

What stocks are reacting to is “the prospect of removing liquidity from the market and hiking up rates”, Rodda says.

“It’s a squeeze on valuations – especially in growth stocks and other ‘duration’-sensitive sectors and assets,” he added.

BNPL companies — perhaps the bellwether for growth on the ASX — are getting smashed again today.

Zip Co (ASX:Z1P) has fallen +75% from its all-time highs and is trading at its lowest level since May 2020.

Rock and a hard place

Money is moving out of equities as central banks tighten policy. So why are rates climbing?

“Of course, this is all tied back to inflation, and the ever growing need across the developed world to get it under control,” Rodda said.

“The problem is, it’s difficult (if not impossible) to bring inflation down without hurting the economy.”

By this point, everyone who follows markets knows inflation has been on the rise.

For Rodda, the post-COVID inflation narrative has an important twist; it’s a short-supply story, more than it’s a long-demand story.

In other words, CPI growth has been largely derived from supply-chain holdups flowing through to higher prices.

That’s more of a problem for stock investors, because it makes the policy challenge more acute than “healthier causes of inflation like stronger demand and higher wages”.

“Effectively, weakening demand – because that’s what central bankers can control – to bring it back into balance with supply,” Rodda says.

And he reckons that paradigm for markets could be in play for a while yet — “perhaps until the drop in asset prices starts to slow global economy”.

“For now, it certainly makes stocks look unappealing,” Rodda says.

Looking ahead

Rounding out his analysis, Rodda also turned his attention to the technical charts for some extra context around the recent selloff.

Last Friday, the ASX 200 broke below the 7,200 support level with a sharp 2.27% fall. That was “huge”, Rodda says.

Then this morning, “6,900 gave way like it was nothing”.

On a shorter time frame, 6,720/30 looks like a key level of support, although I think there’ll be far more choppiness through here,” he said.

“We are looking as oversold on the ASX200 as any point since the March 2020 crash. So I’ll keep an eye out for any turn higher in the RSI (Relative Strength Index) for signs of a bounce.”

Turning to the weekly charts for a longer-term outlook, Rodda said the market looks increasingly vulnerable, with “momentum really rolling over.”

If the sell-offs keep coming, “6,600 looks significant to me — near, incidentally, the 100-week moving average,” Rodda said.