Australian shares plunge after US provides dire warning of prolonged recession

The big banks and the energy stocks are pulling Australian shares lower after a dire warning from the US about a prolonged recession.

The Australian share market plunged at the open of trade after the United States’ financial boss warned of a long and painful economic downturn as a result of the coronavirus pandemic.

The ASX plummeted 1.4 per cent lower in the first 15 minutes of trade, following Wall Street deep into the red as Federal Reserve Chair Jerome Powell provided his bleak outlook.

He said the world’s largest economy may need to dip into its coffers further to provide extra stimulus in the midst of the “biggest shock our economy has felt in modern times” and probably will face an “extended period” of weakness.

The financial and energy sectors suffered the heaviest losses early, with major lender the Commonwealth Bank down nearly 3 per cent while the rest of the big four fell between 2 and 2.2 per cent.

IG markets analyst Kyle Rodda says the weak early trade is "very much defined" by the news from the US overnight.

The ASX has recovered from its historic falls from March but buyers have demonstrated an unwillingness to invest confidently in the market as the economy continues to splutter as a result of the pandemic.

“Compared to other equity markets around the world, our recovery hasn't been quite as strong,” he told news.com.au.

"It's very much a market undecided about the future; we've seen prices track sideways for about a month now.

"It's very much listless conditions.”

Unemployment figures from the ABS released at 11.30am Sydney time was far better than expected, rising to 6.2 per cent compared to the grim forecast of more than 8 per cent.

Nearly 595,000 people lost their jobs in April according to the data, which has had very little impact on the share market as it continues to trade more than 1 per cent lower today.

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This morning Wall Street was falling toward a second straight day of sharp losses, weighed down by worries a slow recovery for the US economy as the country’s death toll from the pandemic edges towards 85,000.

The S&P 500 was down 2.1 per cent, as of 3pm (US Eastern time), with the sharpest losses hitting stocks that most need a healthy economy for their profits to grow.

The Dow Jones Industrial Average was down 567 points, or 2.4 per cent, at 23,194, and the Nasdaq composite was down 2.2 per cent.

Treasury yields were also lower in another sign of pessimism, after Federal Reserve Chair Jerome Powell warned about the threat of a prolonged recession.

He said the US government may need to pump even more aid into the economy, which is bleeding millions of jobs every week as collateral damage in the battle against the coronavirus pandemic.

The market has been wavering the last couple weeks after coming off its best month in a generation, as optimism about reopening the economy collides with worries about the dangers of lifting restrictions too soon.

“At this stage now, we think there are more risks to the downside than the upside,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.

“Consumers in general are going to be more wary and more interested in boosting savings rates and are unlikely to come back to a world of consumption anywhere near what it looked like before,” she said.

Worries that the economic recovery may not be as strong or as rapid as investors had been banking on just a week ago hit oil companies and banks particularly hard.

Energy producers in the S&P 500 fell 4.8 per cent for the biggest loss among the 11 sectors that make up the index.

Financial stocks were close behind with a 3.2 per cent loss. Those two areas of the market have been some of this year’s biggest losers this year on expectations for less demand for oil and lower profit from making loans.

CHINA TENSIONS

Worries about a resumption in trade tensions between the United States and China have also weighed on markets around the world recently.

On Tuesday, the top U.S. infectious diseases expert, Dr. Anthony Fauci, warned that if the economy reopens too soon, it could cause a backtrack in the “road to try to get economic recovery.”

In China, where the virus first surfaced, authorities announced seven new cases on Wednesday. Six were in Jilin province, in the northeast, where alert levels were raised and rail connections suspended. South Korea reported 26 additional cases of the coronavirus over the past 24 hours amid a new spike in infections linked to nightclubs in Seoul.

In Asian stock markets, Japan’s Nikkei 225 slipped 0.5 per cent, the Hang Seng in Hong Kong lost 0.3 per cent and South Korea’s Kospi rose 0.9 per cent. In Europe, Germany’s DAX lost 2.6 per cent, and France’s CAC 40 dropped 2.9 per cent. The FTSE 100 in London lost 1.5 per cent.

The yield on the 10-year Treasury fell to 0.64 per cent from 0.69 per cent late Tuesday. A barrel of US oil to be delivered in June fell 49 cents, or 1.9 per cent, to settle at $25.29. Brent crude, the international standard, fell 79 cents, or 2.6 per cent to $29.19 a barrel.