Friday ASX drop sparked by US recession fears

Recession fears coming out of the US are to blame for Friday’s ASX plunge, one expert says, with more pain ahead for Aussies.

As the US stock market took a dive on Thursday, Aussies woke up braced for their own ASX 200 downfall.

Each of the major US markets closed with sharp losses on Thursday night, as fears of a recession plagued the country.

From opening of trade at 10am on Friday, the ASX dropped a whole percentage within the first half hour, before seeming to stabilise.

On what is now considered to be its worst day in around six weeks, the market fell to 7117.6 after an opening index of 7204.8 – a drop of 1.2 per cent.

Sitting at about 7131 at 10.30am, it eventually reached 7178 at 2pm.

The market has dropped 1.3 per cent over the past week, its biggest fall in the past 11 weeks.

Over the past year, it has fallen 2.25 per cent, hitting its most recent peak on December 2.

The ASX 200 dropped a full percentage within minutes of resuming trade on Friday morning. Picture: Market Index

The market index dropped around 2.25 per cent in the past 52 weeks. Picture: Market Index

Friday morning’s early market slump comes after shareholders all over the world jumped ship and sold shares amid fears higher interest rates would spark a global recession.

Finder investing expert Kylie Purcell told NCA NewsWire the ASX’s 1 per cent drop on Friday morning was largely due to the major fall on Wall Street overnight.

“The main reason markets fell is because of the new commentary from the Federal Reserve, which said it would take a more aggressive approach to raising interest rates next year, which ultimately increases the chance of a global recession,” Ms Purcell said.

“The stock market tends to be quite an emotional beast.

“Interest rates in the US are pretty good, now at a 15-year high at 4.5 per cent, and they’ve basically said they’ll continue climbing to above 5 per cent next year.

“So, even though we’re not necessarily in a recession right now, stock markets do tend to fall ahead of the recession. It’s like a pre-emptive move,” she said.

Ms Purcell said data showing a decrease in retail sales in the US, increased jobless claims and other data is all having an effect on the S&P 500 (the US stock market).

“What happens in the US often has a very direct impact on Australia’s market. Analysts say there’s a good chance Australia will be able to avoid a recession next year,” Ms Purcell said.

“Recent commentary from Jim Chalmers reiterated that view that we will be able to avoid a recession.

“We’re still likely to see economic challenges because of those high interest rates, because of the continued high inflation, which isn’t expected to peak until next year.”

She said the Australian economy has been able to recover from the short recession experienced at the start of the pandemic in 2020, with the help of assistance payments provided by the government.

The graph depicts the large drop in the Australian economy in early 2020, when the pandemic took off. Picture: Market Index

The 2020 recession was reversed very quickly, and the ASX was able to recover, but it seems the consequences of government benefits coming to an end is now effecting the economy.

“What we’re seeing now is kind of the correction we needed to have, with some of those packages no longer being there and with interest rates now rising,” Ms Purcell said.

“We’re having the correction and the economic slowdown that is still a result of that global pandemic.”

The current inflation crisis isn’t expected to peak until mid 2023, amid the potential for the RBA to again increase interest rates in a demanding climate.

Originally published as Friday ASX drop sparked by US recession fears