Bloodbath: $110B Wiped Off ASX After Wall Street Sinks Into Bear Market

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Bloodbath: $110B Wiped Off ASX After Wall Street Sinks Into Bear Market

By Colin Kruger

The Australian sharemarket is in a technical correction after a 5.3 per cent plunge this morning on the back of Wall Street’s benchmark index entering a bear market.

The benchmark S&P/ASX 200 index was down more than 365 points to a low of 6566.1 this morning, with almost every stock on the ASX 200 flat or lower. It marks the ASX 200’s worst loss since the March 2020 nadir when COVID-19 triggered recession fears across global markets.

The ASX is a sea of red on Tuesday morning.

The ASX is a sea of red on Tuesday morning.

It has also sent the index into a correction, having lost about 13 per cent of its valuation since its market high in April. A technical correction is when an index loses between 10 and 20 per cent of its valuation since the last market high.

It follows Wall Street’s benchmark S&P 500 officially entering a bear market after worse-than-expected inflation numbers raised the prospect of aggressive interest rate hikes by the US Fed.

It means that financial markets are pricing in a recession in the US and a worse performance for the local market as the macroeconomic outlook worsens.

Saxo Markets strategist Jessica Amir said its negative outlook on the market is centred on local consumers, who account for 70 per cent of the economy, and will bear the brunt of higher prices. “We’ve been quite bearish for a while on equities, because of higher inflation,” she said.

A research note from Macquarie this morning said its economics team is forecasting a US recession, and an economic slowdown for Australia with 7 per cent inflation.

“We can’t think of a time in the past 15 years when the consumer marco-outlook has looked more challenging,” Barrenjoey’s Tom Kierath said.

The market was 4.8 per cent lower at noon down to 6599.4.

Takeover targets Crown Resorts and Unwired were the only stocks flirting with a gain this morning, with more than $116 billion wiped off the value of the ASX.

The tech sector was down 6.8 per cent, the materials sector – which includes our miners – was down 5.4 per cent, the finance sector dropped around 5 per cent and the energy sector dropped 4.4 per cent.

Biggest decliners:

  • Zip Co -21.4%
  • Block Inc -19.2%
  • Chalice Mining -14.6%
  • Novonix -14.5%

Biggest gains:

  • Uniti 0.2%

The Australian dollar also fell sharply, shedding 1.9 per cent overnight to fall below 70 US cents. At 10.48am AEST, it is fetching 69.47 US cents.

Fears about a possible recession are pounding markets globally and Wall Street’s S&P 500 tumbled into a bear market after sinking more than 20 per cent below its record set early this year.

A report last week that inflation was getting worse, not better as many had hoped, sent a chill through markets that carried over into this week. The S&P 500 sank 3.9 per cent, bringing it more than 20 per cent below the record high it set in January. The Dow Jones Industrial Average lost 2.8 per cent and the Nasdaq composite plunged by 4.7 per cent.

The centre of Wall Street’s focus was again on the Federal Reserve, which is scrambling to get inflation under control. Its main method is to raise interest rates in order to slow the economy, a blunt tool that risks a recession if used too aggressively.

With the Fed seemingly pinned into having to get more aggressive, prices tumbled for everything from bonds to bitcoin, from New York to New Zealand, with the sharpest drops hitting the biggest winners of the earlier low-rate era.

“The best thing people can do is to not panic and don’t sell at the bottom,” said Randy Frederick, managing director of trading and derivatives at the Schwab Centre for Financial Research, “and we’re probably not at the bottom.”

The S&P 500 has fallen into a bear market.

The S&P 500 has fallen into a bear market.

Some economists are even speculating the Fed on Wednesday (US time) may raise its key short-term interest rate by three-quarters of a percentage point. That’s triple the usual amount and something the Fed hasn’t done since 1994. Traders now see a 28 per cent probability of such a mega-hike, up from just 3 per cent a week ago, according to CME Group.

No one thinks the Fed will stop there, with markets bracing for a continued series of bigger-than-usual hikes. Those would come on top of some already discouraging signals about the economy and corporate profits, including a record-low preliminary reading on consumer sentiment that was soured by high petrol prices.

It’s all a sharp turnaround from earlier in the pandemic, when central banks worldwide slashed rates to record lows and made other moves that propped up prices for stocks and other investments in hopes of juicing the economy.

Such expectations are also sending US bond yields to their highest levels in more than a decade. The two-year Treasury yield shot to 3.23 per cent from 3.06 per cent late on Friday after touching its highest level since 2007, according to Tradeweb. It’s more than quadrupled this year.

The gap between the two-year and 10-year yields has also narrowed, a signal of dropping optimism about the economy in the bond market. If the two-year yield tops the 10-year yield, some investors see it as a sign of a looming recession.

The pain for markets was worldwide as investors braced for more aggressive moves from a coterie of central banks.

Stocks have also been hurt by worries about fresh COVID-19 infections in China, which could push authorities to resume tough, business-slowing restrictions.

Some of the biggest hits came for cryptocurrencies, which soared early in the pandemic when record-low interest rates encouraged some investors to pile into the riskiest investments. Bitcoin tumbled more than 17 per cent from a day earlier and dropped to $US23,222, according to Coindesk. It’s back to where it was in late 2020 and down from a peak of $US68,990 late last year.

The last bear market wasn’t that long ago, in 2020, but it was an unusually short one that lasted only about a month. The S&P 500 got close to a bear market last month, briefly dipping more than 20 per cent below its record, but it didn’t finish a day below that threshold.

This would also be the first bear market for many novice investors who got into stock trading for the first time after the pandemic’s start, a period when stocks largely seemed to go only up. That is, they did until inflation showed that it was worse than just a “transitory” problem as initially portrayed.

 

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