From record highs to a correction: what’s going on with the ASX?
Head of Investment Strategy and Economics and Chief Economist, AMP Sydney, Australia
The Australian share market hit a record high at the end of July, finally topping its pre-global financial crisis levels, helped by the election outcome and interest rate cuts.
But no sooner had the peak been reached than the correction began, which is always a risk after such huge gains.
Trade war hots up
The market corrected as there are a couple of threats around, the main one being the trade war between the US and China.
Rather than moving closer to a resolution, this week we’ve seen the trade war escalate as the US imposed more tariffs on China, which responded by allowing its currency, the Renminbi, to fall below seven to the US dollar and reportedly ordering state-owned enterprises to halt imports of agricultural products from the US.
These tit-for-tat reactions pose a threat to the global outlook and that has triggered a pullback in share markets and we could see them fall further.
More falls to come
After such a huge run up a correction is almost inevitable and this time the trigger for that has been the trade issue.
But as we move through August, September and October – a period that is historically weak for share markets – there’s a risk that we could see more downside in share markets in the short term.
Ultimately I do think common sense will prevail and some sort of deal will be worked out between the US and China simply because if they don’t strike a deal it could damage President Trump’s re-election chances next year if the US economy gets weaker and weaker.
When that occurs – and given more help for the US economy and the global economy from central bank interest rate easing – then that should help share markets recover.
But we’ve probably got a little way to go yet in terms of weakness in share markets.
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Dr Shane Oliver, Head of Investment Strategy and Chief Economist-
Important notes
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