Up to four rate cuts on the cards amid $100b wipeout

Treasurer Jim Chalmers has flagged the prospect of up to four cuts in interest rates this year as a result of the deepening global economic turmoil that wiped almost $100 billion off Australia’s sharemarket on Monday.

Fears that US President Donald Trump’s trade war will trigger a US recession sent global markets into a meltdown on Monday, with the ASX 200 plunging 4.2 per cent, its biggest fall since the COVID-19 pandemic of 2020. The Australian dollar plunged to five-year lows of less than US60¢.

Repercussions from US President Donald Trump’s sweeping tariff announcements spread across global markets.Credit: Bloomberg

The violent moves are due to worries that Trump’s trade war will inflict a major hit on world economic activity and spark a US recession, after China retaliated to the US trade barriers and as Europe prepares to take countermeasures.

The ASX 200 has now fallen more than 10 per cent since the start of this year, and the bourse has lost about $175 billion since late last week, when Trump spooked the markets with his “Liberation Day” tariff plans.

The typical superannuation fund has lost about 4.5 per cent this month, SuperRatings said, and there are growing financial market bets the Reserve Bank will respond to the global turmoil by cutting interest rates next month.

As experts warned of more volatility ahead, Chalmers said the impact of Trump’s tariffs on the Australian economy should be “manageable” but noted markets were now expecting about four rate cuts this year, including one cut of as much as 0.5 percentage points at the next Reserve Bank meeting, on May 20.

“I don’t predict or pre-empt those decisions, but the market is certainly now expecting multiple interest rate cuts over the course of the year, beginning in May,” Chalmers said in a press conference in Sydney.

Shadow treasurer Angus Taylor insisted the Coalition had a better track record on the economy, and that it was ready to manage the economy through the turmoil.

“The impact of tariffs on global sharemarkets is impacting Australians’ retirement savings, it is impacting young Australians investing to save for a home deposit,” Taylor said.

The market rout came as new Treasury analysis found the tariffs announced by Trump last week would permanently dent economic growth, but the bigger impact would be on the world economy. Australia’s gross domestic product (GDP), adjusted for inflation, will be 0.1 per cent lower than if tariffs had not been imposed, while inflation will be 0.2 percentage points higher, Treasury said.

Treasurer Jim Chalmers says the impact of Trump’s tariffs on the Australian economy should be “manageable”.Credit: Dominic Lorrimer

The federal Treasury’s analysis was based on an economic model created by leading Australian economist and former Reserve Bank board member Warwick McKibbin. McKibbin said the model revealed the biggest hits by Trump’s tariffs would be on the Australian mining, energy, durable manufacturing and agriculture sectors. Demand for workers across mining by the end of next year could be almost 5 per cent lower than if the tariffs had not been put in place.

Independent economist Saul Eslake said the impact on the Australian economy was likely to be worse than the Treasury forecast because the formal advice could not take into account the uncertainty surrounding Trump’s next decisions – and what he called the “madness” of the White House. “When businesses are uncertain, they put the shutters up – and they put off decisions to invest or employ,” he said.

It was a sea of red on the ASX, with all sectors down sharply and shares in Australia’s biggest companies hit hard: Commonwealth Bank shares crashed 6.2 per cent and mining giant BHP plunged 6.1 per cent. Monday’s 4.2 per cent drop erased about $97 billion in value from the ASX 200.

Perpetual’s head of investment strategy, Matt Sherwood, predicted more volatility ahead, saying there was no obvious “off ramp” for investors. He said it was hard for Trump to back down from the tariffs he had announced, and he believed it was also unlikely the US Federal Reserve would cut interest rates soon.

“The investors are not wanting to catch the falling knife,” Sherwood said. “It’s hard to see things stabilising, at least in the near term.”

Despite the pain, Allekian Family Office managing director Shant Allekian was relatively unfazed by the recent market downturn, saying he views it as an opportunity to buy stocks at low valuations.

“This is opportunity first and foremost, and these types of opportunities only present themselves every handful of years. I bought a lot of things on market open today,” he said.

“Sure, it can be shocking to see these big headline market drops, but it’s important to put things into perspective and understand that longer-term things will revert to the mean, just like we saw during COVID and the GFC [global financial crisis].”

He said anyone with investments or superannuation who might be panicking after today’s downturn should think about why they’re investing, and unless they have a fixed time frame, just ride it out.

“This is where a lot of people can panic and get very nervous and think the whole world is falling apart. But we get these episodes regularly. This isn’t rare, and throughout all of these periods of volatility, the markets come through the other side at some point,” he said.

Shant Allekian sees the market rout as a buying opportunity.Credit: Luis Enrique Ascui

AMP chief economist Shane Oliver said that while he did not think Australia was at risk of recession – which is generally defined as two quarters in a row of negative economic growth – he estimated the US faced a 45 per cent chance of recession, and this was the key concern for markets.

“History tells us that if you have a recession in the US, then you could have a deeper, longer bear market in shares. If you avoid recession, it could be a shorter bear market or just a correction,” Oliver said.

Wall Street’s S&P 500 plunged 6 per cent on Friday in New York after China announced its response to Trump’s reciprocal tariffs of 34 per cent on Chinese imports.

But another reason for the wild swings on markets is investor uncertainty over whether Trump will implement all the tariffs he announced last week, or whether he could back down in the face of the sharemarket plunge.

Montgomery Investment Management chairman Roger Montgomery said it was difficult to see a rebound from the plunge while investors remained uncertain about whether Trump’s tariffs were set in stone or more of a negotiating tactic.

“While there’s uncertainty about that, it’s very difficult to imagine any investors building a case that says it’s safe to go back in now,” he said.

The Federal Reserve could cushion the blow of tariffs on the economy by cutting interest rates, which can encourage companies and households to borrow and spend. But the Fed may have less freedom to move than it would like.

Fed chair Jerome Powell said on Friday that tariffs could drive up expectations for inflation. That could prove more damaging than high inflation itself because it can drive a vicious cycle of behaviour that only worsens inflation. US households have already said they’re bracing for sharp increases to their bills.

With Shane Wright, David Crowe and AP

The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.