It might seem a bit strange that global markets are going through a meltdown due to fears of a potential recession over the next couple of years, especially given the strength of the economy.
Last week, the ASX 200 fell 6.6% – its worst fall since the March 2020 COVID-19 crash.
The Australian equity market is undergoing a correction, having fallen more than 15.5% from its record high in August last year.
To be classified as a “bear” market, it will need to fall at least another 4.5%.
Meanwhile, on Wall Street, the S&P 500 and Nasdaq are deep in bearish territory, having fallen more than 20% and 30%, respectively, from their all-time highs.
Over the past few months, the Reserve Bank, the US Federal Reserve and their global counterparts have raised interest rates aggressively to bring down the cost of living, which has risen at its fastest pace in many years. decades.
They also cut billions of stimulus dollars they had pumped into their COVID-ravaged economies over the past two years – a move that caused their economies to overheat and bubbles to emerge in stock markets, real estate and cryptocurrency. .
“This is a real downturn that’s happening for a real reason,” nabTrade’s head of investment behavior Gemma Dale told ABC News.
“It’s not just the sentiment. Higher rates mean you should pay less for stocks (stocks).
“Any business with high debt is going to perform poorly and a higher interest rate environment,” Ms. Dale said, referring specifically to unprofitable tech and buy now, pay later businesses.
On the other hand, she is more optimistic about stocks of infrastructure and toll roads.
“Any company that can pass its increased costs directly to the consumer, without a significant drop in volume…really is a good company to watch.”
“Too early” to say that the markets have bottomed out
The equity market is going through an increasingly volatile period as there is considerable debate over the speed and extent of the rise in interest rates by the RBA and its global peers.
However, it is difficult for central banks to achieve a “neutral rate”. It’s a great place where they don’t boost the economy or slow it down either.
The US Fed, in particular, does not have a great track record when it comes to avoiding economic downturns during its previous rate hike cycles.
The Fed has “never been able to correct” even lower inflation and employment overshoots “without pushing the economy into a significant recession,” according to Deutsche Bank, which predicts a major recession for United States.
“We remain of the view that a global recession can be avoided,” said AMP Capital chief economist Shane Oliver.
“Anyway, it’s still too early to say that stocks have bottomed out.”
Beware of “dead cat bounce”
Although the market is sinking further into a “correction” or “bear market” phase, some market experts caution against “buying the dip”.
During these tough market phases, there is often a short-lived rally, followed by an even bigger sell-off. It is often called “dead cat bounce” and likened to catching a falling knife.
“I think for a lot of investors there is some risk involved in accumulating right now,” Ms. Dale said.
“And you would want to have a very long period if you looked at the markets at that time.”
“It’s not uncommon for people to feel that the worst has happened and there’s no more bad news in the market. They think, ‘It’s time to buy’, so we see a little bounce.
“Then the next day everyone thinks, this is serious,” and, “Oh my God, I’m out.” And it’s not always the same people.”
Price increase indices
This week, local investors will be watching for words from RBA Governor Philip Lowe to see if he offers any clues as to the scale of the next rate hike (July 5).
After all, he will deliver a speech on Tuesday morning entitled Economic Outlook and Monetary Policy.
According to what he says, this could cause investors to reassess their bets on rising rates (and by extension, on overvaluing their stocks).
The same morning, the RBA will also release the minutes of its June meeting, which may shed more light on why it opted for a larger than expected rate hike of 0.5 percentage points.
Then on Friday, he will speak at an event in Switzerland, organized by the investment bank UBS, on the subject of central banks and inflation.
However, global investors will be more interested in what US Federal Reserve Chairman Jerome Powell has to say about interest rates this week.
Mr. Powell is due to give Wednesday and Thursday (local time) his semiannual testimony on the state of the US economy before the US Senate Banking Committee.
Dr Oliver expects the Fed Chairman to “be hawkish, reiterating the Fed’s commitment to continue tightening until there is clear and convincing evidence” that inflation is on the mend. decrease.
“This is unlikely to reduce market expectations for a hike in the fed funds rate to 3.5% by year-end and well above 4% by mid-2019. next year,” he said.
Market rate forecasts are ‘too hawkish’
The Reserve Bank raised the cash rate to 0.85% earlier this month after announcing a double hike of 0.5 percentage points.
The RBA Governor also gave a rare interview at 7.30am last week, in which he predicted that Australia’s inflation rate would hit 7% by the end of this year, and reiterated his desire to see the cash rate increase to 2.5%.
Dr Oliver said the market expected Australia’s exchange rate to reach “almost 4% by the end of the year and top 4% next year”.
He said, in his view, it was “too hawkish” and unlikely to happen.
“An increase to 4% in the cash rate would push average variable discounted mortgage rates up to around 7.5% (from around 3.5% in April),” he wrote in a note to clients.
“Combined with the spike in fixed mortgage rates (which have already gone from around 2% to around 5%), this would likely cause real problems for consumer spending, [and] a sharp increase in mortgage stress (as debt interest payments will more than double from earlier this year).
He also said it would “depress house prices by 20-30%…indicating that this is unlikely to happen as it would drag the economy down and ultimately bring inflation well below of the RBA’s objective”. [2-3 per cent]”.
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