The Australian share market is set to dive on Monday morning when it opens at 10am AEST.
The SPI200, which is a gauge of how the market will trade in the short term, was down 331 points early on Saturday.
“That’s implying a 4.25 per cent drop in our market on Monday,” veteran stock broker Marcus Padley said.
Front and centre on investors’ minds is concern that the US economy is headed toward a recession.
A recession is generally called when a country’s gross domestic product or GDP contracts for six straight months.
“Brokers are now saying there is a 60 per cent chance of a US recession,” Mr Padley said.
“It is 100 per cent if tariffs stay like this.“
US investment bank JP Morgan says it now forecasts a greater probability of a recession.
“A dramatic shift from the Trump administration toward less business-friendly policies leads us to revise up our already above-consensus recession odds to 60 per cent.”
“Along with the magnitude, the design of US tariff policies is hard to make sense of.
“Tit-for-tat retaliatory policies are underway.
“Beyond the cyclical damage, the long-term harm to the US is a much larger concern.”
Major escalation in global trade war
The comments followed significant global economic developments on the weekend.
China responded to US President Donald Trump’s additional trade impositions on the country (raising total tariffs on China’s imports to 54 per cent) by placing a 34 per cent tariff on all US goods.
This is seen as a major escalation in the trade war between the world’s two largest economies.
Analysts say the critical question for financial markets is whether Mr Trump is using tariff hikes as a negotiating tactic to up-end world trade.
Overnight, fears rose that the tariff hikes were here to stay.
Stock values on Wall Street dived following the news.
In addition, an official US jobs report showed the unemployment rate rising to 4.2 per cent.
This was followed by the chair of the US Federal Reserve, Jerome Powell, warning the US could be facing higher inflation with slowing economic growth.
Crucially, there was no suggestion Mr Powell was looking to ease monetary policy or cut interest rates until he had seen more evidence US inflation was under control.
US recession could drag down world growth
By the close of trade, the Dow Jones Industrial Average had dived 5.5 per cent.
London’s FTSE100 index was 5 per cent lower, as was Germany’s DAX.
The Australian dollar plunged 5 per cent to 60.41 US cents.
“[It is] hard to describe this as anything other than ugly, genuinely grown-up size moves in markets, with forced-selling liquidations and thin liquidity exacerbating the move,” Pepperstone’s Head of Research Chris Weston told ABC News.
“It feels like someone will buckle and fold soon, but for now the visibility to price risk is so poor the equity markets and risk assets continue to fall like a stone.
“This is not a time to be a hero and try and pick the bottom as there’s volatility to play out, but a turn is coming,” Mr Weston said.
Wall Street’s fear gauge, the VIX Index, closed up 50 per cent to 45.31 — suggested significant levels of anxiety in the market.
“The China tariff retaliation has raised the stakes of a global trade war and the chance of a US recession which would drag down world growth,” FNArena’s Danielle Ecuyer said.
“Whether Trump blinks or continues to play chicken remains to be seen.
“The longer the bad news persists, the more damage done to markets and people’s savings with exposure to shares.“
“Share valuations have adjusted down but earnings downgrades are yet to come,” she added.
Investors now await the opening of trade on Monday.
“It looks like we’re going to see a fairly hefty [share market] falls on Monday,” AMP’s head of investment, Shane Oliver, said.
On a brighter note for Australian households struggling with the cost of living, Dr Oliver says this financial markets rout should lead to both lower petrol prices and reduced interest rates.
