ASX plunges to its worst day since 2020 as US recession fears rattle investors

Fears of recession in the world’s largest economy have rattled investors, who wiped about $90 billion off the local sharemarket on Monday, as the bourse suffered its worst two-day sell-off since during the COVID-19 pandemic four years ago.

Panic set across the globe after the US Bureau of Labour Statistics last week released economic data, which heightened fears the employment market was worse than expected and the US Federal Reserve had kept interest rates too high for too long.

The ASX plunged on Monday morning. Credit: Louie Douvis

The S&P/ASX 200 plunged 3.7 per cent on Monday, the worst daily fall since May 2020, after a “bloodbath” on Friday that shot the bourse down 2.1 per cent. The global sell-off smashed Japan’s market particularly hard, with the Nikkei tumbling a record 12 per cent.

The ASX 200 has lost more than $130 billion in the past two trading sessions, tracking the losses on Wall Street, where the S&P500 sank 1.8 per cent on Friday, the Dow Jones dropped 1.5 per cent and Nasdaq fell 2.4 per cent.

After the sharp falls of recent days, which have been driven by sentiment in the US, the ASX 200 is now up 0.3 per cent so far this year.

US employment data showed 114,000 jobs were created in July, significantly below market expectations for jobs growth of 175,000, while the unemployment rate rose to 4.3 per cent – the highest level since October 2021. Another report out of the US showed manufacturing activity, which is highly vulnerable to rising interest rates, was still shrinking, and its contraction was accelerating.

While spooked investors began selling off stocks on US recession fears, economists and market analysts said the index was correcting itself after reaching record highs recently. The ASX 200 surpassed the 8100 mark as recently as Thursday.

“[Australia’s] economy slowed down, but we’re not in a recession,” said David Bassanese, chief economist at Betashares. “Obviously, we’re going to be worried … The old adage here is that if the US economy sneezes, we catch a cold, so we’re watching closely what’s currently happening in the US.”

Investors will on Tuesday closely watch the Reserve Bank’s decision on interest rates, after last week’s inflation figures raised the odds of a cut in Australian interest rates this year.

All 11 sectors of the ASX retreated on Monday, with tech stocks (down 6.44 per cent) taking the sharpest hit, amid investor fears that bets on big-tech valuations are too high and news over the weekend billionaire Warren Buffett slashed his stake in Apple by 50 per cent.

Warren Buffett slashed his shares in Apple by 50 per cent over the weekend.Credit: AP

Local tech stock WiseTech Global crashed 8.81 per cent, suffering the worst drop among large-caps on the bourse, while Xero was down 5.55 per cent and NEXTDC fell 7.39 per cent.

Healthcare (down 1.95 per cent) recorded the smallest drops, largely on the back of ResMed shares rising 2.92 per cent to become the only large-cap stock to advance on Monday.

AMP chief economist Shane Oliver said the RBA’s path to taming inflation had narrowed even further following the release of the US economic data.

“I think the risk of a recession is significant [in Australia] and it can’t be ignored, so that’s why I thought another talk of a rate hike was over the top,” Oliver said.

“The US money market at the start of the year was pricing six to seven Federal Reserve cuts starting as early as March, and local money markets was pricing in cuts by mid-year. Then we had inflation scare in the US and then Australia, that’s delayed the start of rate cuts … but it may have been that that’s the straw that broke the camel’s back.”

Oliver noted the market pulled back last year around the same time, suggesting the ASX was going through a seasonal correction.

Moomoo market strategist Jessica Amir said institutions globally were bracing for more panic and expecting another pullback amid recession fears in the US and tensions escalating in the Middle East, after Israel assassinated Hamas political chief Ismail Haniyeh in Iran last week.

“It’s very normal for markets to experience a pullback. Markets don’t go up in a straight line, and we just have to remember that,” Amir said.

The market is expecting cash rates around the world to cool faster. Shaw and Partners senior investment adviser Craig Sidney said investors anticipate the Feds to cut the interest rate to 3 per cent, down from the current 5.5 per cent, in December next year. The RBA is expected to slash the rate to 3.5 per cent by then.

Locally, Seek’s latest employment report shows job advertisement volumes declined month-on-month, dropping 17.1 per cent in June compared to the same time last year. Applications per job advertisement have risen 3 per cent in a month, and are up 61 per cent compared to a year ago, highlighting the tight labour market in Australia.

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