The ASX has mirrored the US indices performance today as Wall Street tumbled more the 3% overnight. The ASX200 hit a new 23-month low shortly after trading began this morning, shedding over 100 points. The benchmark index has now fallen around 12% from its late-August high and is hovering just above a two-year low.
The broader All Ordinaries also fell a similar amount as investor sentiment from the US–China trade truce wanes.
Shaky truce only partly responsible
The fall shouldn’t come as much of a surprise to investors as scepticism increases surrounding the US–China trade truce, amid wider economic growth fears hitting US markets.
While the White House remains optimistic but ‘cautious’ about the ceasefire with China, investors will be left in limbo as tariff uncertainty is set to extend well into the new year.
According to Citigroup economist, Cesar Rojas, ‘uncertainty is likely to remain high and continue to impact trade and investment plans’, stating that he expects tensions to move beyond trade with expectations of additional investment restrictions to be placed on China.
Despite Washington’s optimism, it appears the market is in the midst of figuring out whether or not there will be a real deal at the end of the 90-day ceasefire with China.
US President Donald Trump only added more uncertainty to the trade deal, stating he may extend the 90-day truce, while his top economic advisor back-tracked from the president’s announcement that Beijing has agreed to cut tariffs on US-made cars.
Bond markets are also hurting investor sentiment. The benchmark 10-year yield on US treasury bonds fell to its lowest point since mid-September.
This fall has stoked fears the US economy is facing a significant downturn next year. The spread between the 10-year bond yield over the two-year notes has shrunk to its smallest in over a decade. When the two-year yields more than the 10-year bond an inversion in the yield-curve occurs.
Historically, an inverted yield curve has tended to foreshadow US recessions.
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The five-year US Treasury note was yielding 2.79%, compared with 2.80% for the two-year security. The yield on the 10-year note slid six basis points to 2.91%.
The inversion of parts of the US bond yield curve could be a warning of what lies ahead for the US indices. Oliver Jones of Capital Economics believes the market still has a ways to go before it finds a bottom.
‘History suggests that once the Treasury yield curve becomes very flat or starts to invert, the stock market tends to struggle over the following couple of years, as the economy eventually starts to weaken.’
Optimism gone from Australian economy?
Compounding matters further, fears of a looming bullish market could soon be realised as Australia’s economic growth begins to slow.
Recent figures show economic growth slowed to 0.3% in the September quarter, its weakest pace in two years, as a sharp fall in mining investment weighed on the economy.
Economists had forecast growth of 0.6% for the September quarter and an annual growth of 3.3%. Growth in the 12 months to September slowed to 2.8%, according to data released Wednesday by the Australian Bureau of Statistics.
Economists said annual growth for 2018 was now likely to miss the Reserve Bank’s 3.5 % forecast, possibly coming in below 3%.
According to AMP Capital’s Chief Economist Shane Oliver, ‘There was a lot of optimism at the start of the year but then worries emerged on inflation, trade and emerging markets. When investors are feeling nervous about the outlook, they tend to focus on the negatives.’
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Today, some stocks that have performed well throughout the year were hit hard. The Australian financial, healthcare and telco sectors were the notable underperformers. With industrial, tech and energy share trailing close behind.
The ongoing political turmoil in the UK is likely to spell more uncertainty for markets as the Brexit battle rages on. Theresa May’s government was found in contempt of parliament on Tuesday for refusing to release the full legal advice their planned exit from the EU.
The finding comes just as the UK parliament begins five days of debate before politicians vote to facilitate the exit next week.
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