The Australian share market’s golden recovery came to a screeching halt after the United States provided a sobering reality check of the true cost of the coronavirus pandemic.
Investors had been scrambling back into the market on the belief the worst of the economic shock was in the rear view mirror but the Federal Reserve poured cold water on this narrative in its outlook overnight.
Among a number of concerning forecasts, it expects unemployment in the world’s largest economy to soar to 10 per cent by the end of the year.
This triggered an aggressive sell-off on Wall Street and the local indices followed, where investors abandoned their positions and the ASX plunged more than 3 per cent lower.
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Global markets were expecting the Federal Reserve to provide optimistic talking points and upwards projections, CMC Markets chief strategist Michael McCarthy told news.com.au.
“That optimism they were looking for did not eventuate and we’ve seen a very sharp turn around in sentiment,” he said.
Today’s session attracted about 40 per cent more activity than average which Mr McCarthy described as a “heavy commitment” from sellers to exit the market, suggesting losses will continue at the open of trade tomorrow.
“The fall back through the 6000 level for the index brought further selling with it, it’s an important decision point for this market and to fail below it was bad news,” the veteran strategist said.
“And that close near the bottom of the range suggests we could see further damage to Australian share prices over the coming days and weeks.
“The potential for a V-shape recovery and thinking around that is receding.”
Today’s result snaps a seven day run of positive gains for a market which has recorded a healthy rise since the depths of the economic shock of the pandemic.
The broader All Ordinaries rose more than 30 per cent from March 23 through to the close of trade on Wednesday, adding about $500 billion in value to the index.
But Mr McCarthy said the reality check delivered today was the turning point in the path to recovery.
The Federal Reserve also noted interest rates are likely to stay at historic lows through to 2023, which places enormous pressure on banks’ loan margins.
The major lenders — Westpac, Commonwealth Bank, ANZ and NAB — all suffered significant falls as a result, plunging between 4.4 and 6.2 per cent.
Burman chief investment officer Julia Lee said the major test for the market’s recovery will come when companies report their earnings towards the middle of the year, when the true cost of the pandemic will be revealed.
Many investors have gambled on a snapback in fortunes, heavily buying up shares.
“The big question in the medium term is if earnings growth has come to the party or whether we will continue to see weakness and see prices being dragged back down,” she told news.com.au.
“At the moment it’s a battle between the outlook for earnings versus expectations, and at the moment the market is pricing in a recovery.
“As long as those earnings materialise then the market is fine, but if those earnings don’t materialise then prices will come back down to earth to reflect that.”