The ASX slid 0.7% as a late-session pullback dragged gold shares lower amid speculation over the next Federal Reserve Chair; bullion dropped approximately 5% due to interest rate hike fears.

A dramatic late-day reversal saw the Australian share market surrender all of its Friday gains, plunging 0.7% as sudden concerns about the future trajectory of US interest rates took hold.

Gold shares were particularly hard-hit by rumors that the US President was poised to nominate Kevin Warsh as the next Chair of the US Federal Reserve.

Warsh is perceived as more hawkish than other candidates

A former Fed governor, Warsh was seen visiting the White House after President Trump announced he would reveal the new Fed chair on Saturday, Australian time.

Warsh is viewed as less inclined to implement a rapid series of interest rate cuts compared to some other candidates, which triggered a sharp decline in the price of gold and inflicted significant collateral damage on Australian gold shares.

From gains to sharp losses as bullion drops 5%

During the afternoon sell-off, the most severe in nearly two weeks, the ASX 200 dropped 58.4 points, or 0.7%, to 8869.1 points after having earlier climbed to 8971.6 points.

Despite the fall, only 4 of the 11 sectors finished lower, and the index remained up 1.8% for January and was also 0.1% higher for the week.

Gold bullion fell as much as 5% on the Warsh speculation, settling around US$5200 an ounce, while the US dollar strengthened.

Silver ended near US$111 an ounce, and the Australian dollar slid 0.7% to approximately US70.05¢.

Materials bear the brunt

The Materials sector was the worst performer on the ASX, falling more than 3% as investors offloaded gold shares.

Among the hardest hit were Ora Banda (ASX: OBM) shares, which plunged 11.7% to $1.28, while Newmont (ASX: NEM) shares lost 7.9% to $173.53 and Genesis Minerals (ASX: GMD) shares fell 9.9% to $7.59.

Even the major miners were impacted by the downturn, with Rio Tinto (ASX: RIO) shares down 3.5% to $151.55 and BHP (ASX: BHP) shares declining 1.8% to $50.57.

Defensive earnings sought

Defensive shares enjoyed a rare positive day, with the healthcare sector outperforming as investors sought safe havens ahead of an anticipated Reserve Bank of Australia interest rate hike in the coming week.

CSL (ASX: CSL) shares rose 1.1% to $181.42, while sleep device company ResMed (ASX: RMD) shares climbed 3.1% to $37.54 after exceeding second-quarter earnings forecasts.

Energy stocks moved in divergent directions.

Whitehaven Coal (ASX: WHC) shares fell 6.7% to $8.83 as investors took profits following a 13% monthly gain.

Oil and gas companies continued to trade strongly, with Woodside (ASX: WDS) shares up 0.8% to $25.37 and Santos (ASX: STO) shares rising 2.5% to $7.01.

Nine Entertainment (ASX: NEC) shares climbed 5.1% to $1.14 as it acquired digital outdoor advertising group QMS Media for $850 million and sold its radio division to the Laundy family.

Shares in lithium miner Pilbara Minerals (ASX: PLS) fell 6.5% to $4.29 after reporting a solid December quarter, where higher realised lithium prices drove a 49% revenue jump to $373 million despite lower production volumes.

Shares in Star Entertainment (ASX: SGR) plummeted 15.6% to 13.5¢ after it warned of ongoing uncertainties following a pre-tax and interest profit of just $6 million for the December quarter.

The week ahead

It requires no guesswork to determine which upcoming announcement will dominate discussions, with the Reserve Bank highly likely to raise official cash rates at its first meeting of the year on Tuesday.

While the actual decision—now strongly tipped to be a hike due to firming inflation numbers—will be the main focus, there will also be extensive analysis on whether this represents a one-off increase or the first in a series of rises.

High chance of interest rate rise

Most economists anticipate a rate hike on Tuesday, citing entrenched underlying inflation pressures, but debate continues on whether the board will opt for a single increase before awaiting further data or embark on a series of hikes to decisively curb inflationary pressures.

Regardless, it is highly probable that after Tuesday, official interest rates will increase by 0.25% to 3.85%, triggering a cascade effect across home loans, other loans, and deposit rates.

RBA Governor Michele Bullock will also testify before Parliament on Friday.

In the UK, the Bank of England (BOE) is expected to maintain its benchmark interest rate at the current 3.75%, despite UK inflation remaining the highest among G7 nations.

The European Central Bank is also anticipated to hold its benchmark rate at 2% on Thursday, amid divided opinions on the inflation outlook.

Other key international events to watch include US job figures and China's manufacturing data.

Corporate profit season arrives

Domestically, other highlights include home values, job advertisements, and building approvals, but the most significant news will be the commencement of the corporate reporting season.

Companies scheduled to report include Credit Corp, Amcor, Centuria Office REIT, Boss Energy, Pinnacle Investment Management, Beach Energy, Garda Property, News Corp, and REA Group.

The US fourth-quarter earnings season also continues, with reporting companies such as Walt Disney, Palantir Technologies, AMD, Amgen, Merck, Mondelez, PayPal, PepsiCo, Pfizer, Take-Two Interactive Software, Alphabet, Eli Lilly, Novo Nordisk, Uber Technologies, ARM Holdings, Ford, Qualcomm, Snap, Amazon.com, Barrick Gold, Bristol-Myers Squibb, and Estee Lauder.