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go throughDavid Taylor
Business reporter
in short:
(ABC – Australia) Global financial markets fell on fears of a US recession.
On Friday local time, the Nasdaq index, which has the largest proportion of technology stocks, fell 2.43% and is currently in a technical adjustment stage.
What’s next?
Analysts said further weakness in the economy and financial markets could put pressure on the central bank to ease monetary policy.
There are real concerns that the world’s largest economy is heading for a recession, and that fear is gripping global financial markets.
Official U.S. unemployment claims data released Thursday evening showed a staggering number of Americans out of work.
Other data showed weakness in the manufacturing sector, adding to concerns about the U.S. economy.
The news sent global financial markets into turmoil on Friday amid concerns that the U.S. economy could be headed for a so-called “hard landing.”
“The correction is underway,” said Shane Oliver, head of investment strategy at AMP.
The move follows stunning gains in US and Australian share prices in the past few weeks and months.
“Share prices surged in July on positive news on inflation, growing optimism about future rate cuts and optimism about IT and AI-related earnings,” said Oliver, who manages $3 billion in investments.
The Federal Reserve announced later this week that it would keep the official interest rate unchanged at 5.25% to 5.5%.
This was seen as “good news” at the time, given that Federal Reserve Chairman Jerome Powell had conditionally committed to cutting interest rates in September.
However, investors later questioned whether it was a policy mistake given weaker-than-expected economic data and suggested the Fed chairman should have cut interest rates earlier.
The problem is that, as in Australia, the Fed is reluctant to cut rates until it sees further evidence that inflation is cooling.
The core concern of the stock market rout is that the U.S. central bank will keep interest rates too high for too long.
“The (benchmark) ASX 200 index surged to over 8,100 points midweek, driven by lower-than-expected inflation and the prospect of easing (interest rates) by the Federal Reserve,” Dr Oliver said.
“But as global growth concerns saw the market gain just around 0.3% for the week, gains reversed on Friday, with losses in financials, healthcare and materials stocks largely offsetting gains in all other sectors.”
Bond yields fell sharply, reflecting expectations of rate cuts and demand for safe havens.
For example, as of early Saturday morning Australian Eastern Time, the yield on the US 10-year Treasury bond had fallen to 3.79%.
Earlier this week, the pair was trading at 4.2%.
When the stock market fluctuates, stock investors tend to turn to the relative safety of bonds, which causes bond prices to rise and bond interest rates to fall.
Bond yields move inversely to prices
U.S. stocks suffered another sell-off overnight.
Moreover, weaker economic news has again made investors more pessimistic.
U.S. employment data showed the unemployment rate climbed to 4.3% – the highest level so far in 2021.
The Labor Department reported that nonfarm payrolls increased by just 114,000 jobs last month, down from 179,000 in June and below the 185,000 expected by economists surveyed by Dow Jones.
This is further evidence that the U.S. economy may be in trouble.
Marcus Today market analyst Henry Jennings said global investors are panicking over the prospect of a U.S. recession. (ABC)
U.S. stocks fell sharply on expectations that economic demand would fall.
The broader market index closed down 1.84% at 5,346.56 points.
this Nasdaq Composite Index The Dow Jones Industrial Average, which includes large-cap technology stocks, fell 2.43% to 16,776.16, taking the tech-heavy index more than 10% off its recent all-time high.
This means that Nasdaq has entered a “technical adjustment” phase.
this Dow Jones Industrial Average It closed down 610.71 points to 39,737.26, a drop of 1.51%.
The 30-stock index fell as low as 989 points during the session.
“We continue to believe that lower interest rates will boost stock markets over a six to 12 month period, assuming a recession is avoided,” Dr Oliver said.
“However, global and Australian share markets look vulnerable to further declines over the coming months, meaning it is too early to buy the dip now as: valuations are stretched; investment sentiment looks somewhat optimistic; recession risk is high; and the US stock market is heavily reliant on technology stocks to keep its critical run going.
“Geopolitical risks are high, especially during the U.S. election, but also in the Middle East, where the risk of an escalation to a war with Israel is growing, with Hezbollah and Iran involved, and oil supplies at risk.”
Henry Jennings, market analyst at Marcus Today, said that fundamentally, global investors are panicking about the prospect of a U.S. recession.
“The U.S. 10-year bond yield (interest rate) has fallen below 4%,” he said.
“Economic data are warning about the economy and talk of a recession has resurfaced.
“Earnings (or US corporate profit announcements) failed to deliver in some places and bullish sentiment was quickly replaced by negative swings.
“Japan is under great pressure, which has also hit market confidence in the region, and some spillover effects are expected.”
He added: “We are sinking into a sea of turmoil and new worries.”
However, these new concerns could lead to lower interest rates in the United States and Australia sooner than expected.
Angus Coote, co-founder of Jamieson Coote Bonds, said continued sharemarket selling pressure and its impact on the economy would give the Reserve Bank a rethink.
“I think the RBA will cut rates as early as November,” he said.
“I think it would take something relatively extreme for the stock market to get the RBA to consider cutting rates before November, but that’s not impossible.” ABC
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