Since March 23, global equity markets have been on the up but the run has just hit a screeching halt.

Overnight equity indices in North America and Europe plunged, particularly the Dow which dropped nearly 7 per cent. This morning the ASX followed suit falling nearly 3 per cent.

In a more telling statistic, more than 10 times the number of ASX stocks had fallen than had gained in the first 10 minutes of trade.

Why the sudden fall?

 

COVID-19 has always been serious

Australia has avoided an escalation of COVID-19 cases as seen in many other countries. But the Morrison government has conceded the economy is in recession.

While states are gradually re-opening there are fears the recovery may be hindered by delays in removing restrictions, particularly the closure of state borders.

Prime Minister Scott Morrison also said this week he would not extend the JobKeeper and JobSeeker stimulus packages past September

Meanwhile, in the nation with the most COVID-19 cases, the US, it has become clearer this week that the road to recovery is far longer than investors had hoped.

Jerome Powell, chairman of the Federal Reserve, on Wednesday (US time) poured cold water on the idea of a rapid ‘V-shaped’ economic recovery.

Among other comments, Powell said he was not even thinking about raising interest rates for the next couple of years.

He also argued more spending would be needed — a sentiment that was echoed by Treasury Secretary Steven Mnuchin.

“I do think the economy is going to rebound significantly, but there is still significant damage in parts of the economy,” Mnuchin said.

“We’re going to use all of our fiscal tools to work with Congress to restore this economy to where it was.”

Furthermore, rising case numbers out of the US, as states gradually re-open, have sparked fears of a second wave.

Earlier this month investors were encouraged by promising jobs figures out of the US. But jobless claims are still over 20 million, more than double their peak during the GFC.

 

The correction we had to have or something more serious?

Analysts are attributing the sudden downhill trend to the fact that investors are realising it will be a longer recovery than expected.

Kristina Hooper, the chief global market strategist at Invesco, said overnight Jay Powell had thrown “a lot of cold water on that [recovery] narrative”.

However she also noted that “typically the initial reaction to the Fed press conference is not the subsequent reaction. There needs to be some digestion by investors”.

In a client note this morning, NAB forex analyst Ray Attrill reserved judgement as to whether this was the start of something more serious.

But he noted maybe the market had been overbought in recent days.

Attrill said the scale of the recent equity market run up, which by all accounts had been driven in a large part by high participation from retail investors, took some technical indicators, such as the Relative Strength Indices, off the charts.

However, he believes central banks actions will help risk assets.

“We don’t doubt the ongoing power of central bank policy actions, from the Fed in particular, in continuing to place a floor under risk assets relative to the underlying economic fundamentals on which stock prices are supposed to be based,” Attrill said.

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