THE Australian sharemarket is poised to drop below the critical 4000-point barrier today as global fears of a slowdown sparked panic on Friday, wiping billions of dollars from the world's stockmarkets.
The Dow Jones Industrial Average Index lost 2.2 per cent after US employment rose only 69,000 in May, which was less than half of what most economists had forecast.
The US panic was joined by huge falls on other bourses Germany's sharemarket lost 3.42 per cent and Canadian stocks fell 2.21 per cent. UK shares shed 1.14 per cent, and the Nikkei dropped 1.2 per cent as British manufacturing slumped to a three-year low and European unemployment rose to a record 11 per cent.
Analysts warned investors yesterday to prepare for another "stomach churner" this week as the Reserve Bank decides on interest rates tomorrow. Some economists tip the central bank to slash the official cash rate by 50 basis points returning to near the emergency setting of the global financial crisis.
The futures index is pointing to a 58-point, or 1.4 per cent, fall in the Australian equity market, which would taking it to a nine-month low of 4012 points.
The market fractures come as Europe's financial problems hit a critical point, with Spain the eurozone's fourth largest economy now at risk of needing to be bailed out given its banking system problems.
Speaking at a weekend conference in Italy, US billionaire George Soros said the euro crisis which he defined as a sovereign debt crisis and a banking crisis closely interlinked was threatening to destroy the European Union and plunge it into a lost decade such as experienced in Latin America in the 1980s.
Mr Soros said Germany had three months to lead the way out of the crisis or it would be too late.
The realisation of lower global growth, together with increasing financial instability across Europe, has spurred on the collapse in yields on high-quality government bonds.
Benchmark 10-year bond yields fell to 1.45 per cent in the US, while yields on Australian government long-term bonds continued to push record lows of 2.83 per cent.
Elsewhere, gold on Friday jumped more than 3 per cent to $US1609 an ounce as investors looked for low-risk assets, while the Australian dollar was trading at near eight-month lows of US96.87?.
Fund managers said the panic increased the chances of another round of quantitative easing in the US, which could encourage investors to return to equities.
"It doesn't bode well for the beginning of this week," said Will Seddon from White Funds Management.
"But there's now a much stronger argument in favour of further quantitative easing by the US Federal Reserve, and we know that China's starting to talk more about what policy actions they might take to stimulate their growth," he said. "So this fear might soon flip around and be more focused on the opportunity for easier money, or the stimulus that the fear might encourage."
Spurring on the shock to global confidence were the softer-than-expected US employment figures. Only 69,000 jobs were created in May, less than half the consensus forecast. That suggested the US economy was again slowing. European unemployment hit a record 11 per cent while UK manufacturing hit three-year lows.
This caused the Dow Jones Industrial Average Index to fall 2.22 per cent, erasing its gains for 2012.
Stephen Walters, chief economist at JPMorgan, said there was a strong chance the Reserve Bank could cut the cash rate by 50 basis points tomorrow. This would take the official cash rate to 3.25 per cent, just one notch above the 3 per cent of mid-2009.
Frequently Asked Questions about this Article…
Why is the Australian sharemarket poised to fall below 4,000 points today?
Global fears of a slowdown sparked panic in overseas markets after weaker-than-expected US jobs data (only 69,000 jobs created in May) and fresh signs of trouble in Europe. Futures pointed to a 58-point (1.4%) fall that would take the market to about 4,012 points, a nine-month low, according to the article.
What triggered the recent global stock market sell-off and Dow Jones fall?
The sell-off was driven by softer US employment numbers and mounting European financial stress. The Dow Jones Industrial Average fell about 2.2% after the weak US jobs report, while other major bourses—Germany, Canada, the UK and Japan—also recorded sharp declines as European unemployment hit a record 11% and UK manufacturing slipped.
Is the Reserve Bank of Australia (RBA) likely to cut rates and how could that affect investors?
Some economists signalled a strong chance the RBA could slash the official cash rate by 50 basis points, which would take it to about 3.25% according to JPMorgan’s chief economist cited in the article. The prospect of a rate cut is adding to market volatility and is being watched closely by investors because it can influence borrowing costs, bond yields and equity sentiment.
Could the US Federal Reserve do more quantitative easing (QE) and what would that mean for markets?
Fund managers quoted in the article said the panic increased the chances of another round of quantitative easing in the US. The article notes that further QE could encourage investors to return to equities, since easier money and stimulus tend to lift asset prices.
How did bond yields and gold react during the market panic?
Benchmark 10-year US government bond yields fell to about 1.45%, and Australian long-term government bond yields moved to record lows near 2.83%. At the same time, gold jumped more than 3% to around US$1,609 an ounce as investors sought lower-risk assets.
What did the article say about the euro crisis and Spain’s banking risks?
The article reported that Europe’s financial problems had reached a critical point, with Spain—the eurozone’s fourth-largest economy—at risk of needing a bailout amid banking system troubles. US investor George Soros warned the euro crisis, combining sovereign debt and banking problems, could threaten the European Union.
How did the Australian dollar respond to the global market turmoil?
The article said the Australian dollar was trading near eight-month lows, quoted around US96.87, as investors moved toward safer assets amid the global sell-off.
What should everyday investors take away from this market panic and volatility?
The article highlights two key points: first, short-term volatility can be severe—analysts called the week’s trading a potential “stomach churner.” Second, panic can increase the chance of policy responses such as rate cuts or QE, which historically can create opportunities for markets to recover. The piece presents these developments as factors investors should monitor rather than specific buy-or-sell instructions.
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