Australian dollar drops to 11 year low as an economic slowdown hits global economy
The Australian sharemarket has taken a dive and the dollar has plummeted to nearly its lowest value in more than a decade, as the coronavirus outbreak threatens to derail the global economy.
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The Australian share market’s remarkable gains for the year have vanished in four days of tumultuous trading.
The S&P/ASX200 index was down 44.1 points, or 0.66 per cent, at 6,664 at noon AEDT on Thursday, erasing all the gains its made since it closed on January 2 at 6,690.6 points.
The benchmark index - which peaked at 7,190.3 last week - hit a three-month low of 6,663.9 in mid-morning trade on Thursday as investors fretted about the potential impact of the coronavirus outbreak on global growth. There was a brief spike before it fell again after news that business investment slumped by a worse-than-expected 2.8 per cent during the December quarter. The broader All Ordinaries index fell 42.7 points, or 0.63 per cent, to 6,748 points after a decline in all sectors except health care.
Consumer staple A2 Milk was an early riser, surging more than five per cent to $15.87 by midday on rising China demand for its infant formula. Air New Zealand rose one cent to $2.33 after slashing capacity in Asia to deal with the fallout of the coronavirus outbreak on travel.
But most of the big miners and all of the big banks were trading lower at midday, and energy companies were lower after another overnight slide in the price of oil.
IG market analyst Kyle Rodda says the absence of hard-hitting coronavirus news was likely behind a relative calm on global markets overnight but traders remained on edge.
“The situation remains fraught with danger, as the number of new cases of the coronavirus outside of China begins to exceed those within China,” he said. The Australian dollar was buying 65.53 US cents at midday AEDT on Thursday, down from 65.88 US cents on Wednesday.
IG market analyst Kyle Rodda said the absence of hard-hitting coronavirus news was likely behind the relative calm.
“Nevertheless, the situation remains fraught with danger, as the number of new cases of the coronavirus outside of China begins to exceed those within China,” he said.
“That dynamic is keeping traders on edge, with markets pricing-in the potential for a sustained economic slowdown.”
‘ECONOMIC IMPACT IS VERY SIGNIFICANT’
Yesterday, the ASX 200 plunged by 1.9 per cent, with the fall wiping another $39 billion from the value of the nation’s 200 biggest listed companies.
The ASX 200 dropped by 132 points to 6734.3 points in the opening minutes of trade on Wednesday.
Wall St had plunged by another 3.2 per cent overnight on Tuesday after the US Centre for Disease Control and Prevention told the nation to brace for and outbreak of the COVID-19 virus.
The statement said an outbreak of COVID-19 was a matter of “not if, but when” and warned of disruption to social and sporting events, as well as economic activity.
Oil prices also continued their fall on fears of a demand hit from the flu-like virus that has infected more than 80,000 people.
Blue chip favourites were again battered this morning as Commonwealth Bank shed 1.5 per cent to $85.52, Westpac fell 1.5 per cent to $24.71, National Australia Bank lost 1.6 per cent to $26.38 and ANZ was off 1.3 per cent to 26.24.
Among the major miners, BHP slumped 1.6 per cent to $35.72 while Rio Tinto was down 1.3 per cent to $92.40.
Telstra dropped 4.4 per cent to $3.44, Coles was down 1 per cent to $15.3 but Woolworths rose 0.2 per cent as investors welcomed its latest profit update.
Biotech giant CSL gave up 2.4 per cent to $316.33.
Meanwhile, Treasurer Josh Frydenberg is remaining coy on whether the economic impacts of the coronavirus could compromise his government’s planned budget surplus or even cause a recession.
Asked whether a recession might be on the cards in Australia due to the virus, Mr Frydenberg has said “that’s not the word that I would use”.
“What I would say, though, is that the economic impact is very significant already and of course the virus continues to evolve,” he told Sky News today.
SHAREMARKET ‘COULD DROP BY 20 PER CENT’
It’s completely normal for share prices to be volatile and sometimes suffer sharp falls of the kind seen on the ASX in the past two days.
What isn’t normal is how Australian and global shares seemed immune to coronavirus concerns over the past couple of months and continued reaching record highs.
But not anymore. Australian stocks have slumped four per cent since the start of the week, while US, British and European shares fell three to four per cent in just one day.
As the deadly virus spreads beyond China, financial markets finally pressed the panic button – spooked by fears that more countries will close borders and damage the global economy.
CMC Markets and Stockbroking chief market strategist Michael McCarthy said while the virus has had a “dreadful human cost”, markets are more interested in economics and are now worried that global trade could grind to a halt.
He said the sudden change in sentiment suggests further falls could lay ahead for stocks, while AMP Capital chief economist Shane Oliver said the spread of the virus has increased the risk of a sharemarket fall near 20 per cent.
However, Dr Oliver’s “base case” of containment is for an economic rebound in the June quarter.
He said whether markets fall another five per cent, 20 per cent or no further, it makes sense for investors to “turn down the noise around the virus and stick to a long-term investment strategy”.
Mr McCarthy said corrections are a normal part of investing and we have been due for one anyway.
“Investors shouldn’t be too concerned – this is not the end of the world,” he said.
Super fund members will take a hit if the market falls continue, but they generally have decades to ride out the ups and downs of financial markets – and shouldn’t deviate from their long-term plans.
Investors and super fund members who sold out of shares at the bottom of the Global Financial Crisis – when Aussie stocks had plunged 55 per cent – missed out on the decade of strong returns since then.
Other global health scares such as SARS and swine flu had short-term impacts on sharemarkets before they recovered quickly.
If you’re actively trading shares, tread carefully and be wary of stocks that are already under pressure as they could be among the hardest hit in a broader downturn.
Travel companies have already been stung – Helloworld Travel shares are down 17 per cent since January and Flight Centre has dropped 19 per cent.
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Even companies likely to do well from the virus – biotech giant CSL and medical gloves maker Ansell – have fallen in the past couple of weeks.
The uncertainty for financial markets now mirrors the uncertainty face by the global community around the virus’s next moves.
Originally published as Australian dollar drops to 11 year low as an economic slowdown hits global economy
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