What’s going on with Australian shares and global markets? Your questions answered

by Admin
August 6, 2024

It has been a wild couple of days on the Australian (and global) share market.

The huge falls on the ASX on Friday and Monday, as well as on Wall Street, may have made investors — and those with superannuation funds tied to the stock market — nervous.

But after the share market experienced its worst two days of trade since since 2020, the index closed higher today.

So why is the ASX all over the place, what does it mean for investors and how will this continue to play out?

These are some of your most pressing questions answered by the ABC’s chief business correspondent Ian Verrender, business reporter David Taylor and the rest of the business team.

What’s causing the share market volatility?

Ian Verrender has been following the market upheaval over the past few days. He says Wall Street has been running on a boom unlike any other for more than a year.

Just a handful of stocks has ruled proceedings in the race to Artificial Intelligence domination.

The previous tech boom, the dot.com boom 25 years ago, saw hundreds of hopefuls raise cash from hapless investors and blow it on loss-making ventures.

Only a couple survived and some are now battling it out in AI. However, the difference this time is that, while these companies are hugely profitable and can afford to blow billions, they’ve all been priced for glory.

Bigger investors, having smelt the sizzle, now want to see the steak. And in recent months, some have figured the Magnificent 7 – Amazon, Apple, Alphabet, Microsoft, Meta, Nvidia and Tesla – have been overcooked.

Over the weekend, it emerged that Berkshire Hathaway boss Warren Buffett sold half his stake in Apple in the past few months, which is about 390 million Apple shares.

And who are the ‘Magnificent Seven’?

In the markets world, “Magnificent Seven” refers to a group of seven particular stocks that are highly influential on Wall Street. They include:

Alphabet (Google’s parent company)
Amazon
Apple
Meta (Facebook’s parent company)
Microsoft
Nvidia (which makes chips used in artificial intelligence)
Tesla

Altogether, those seven companies shed about $US800 billion ($1.23 trillion) during trade on Wall Street on Monday night on fears an American recession could be around the corner.

It’s worth pointing out though that these companies have gone from strength to strength on the markets recently.

Apple, Nvidia and Microsoft have all been jostling for the title of most valuable company on Wall Street.

What about Asia’s markets and Japan in particular?

Here’s Verrender:

While you can never point the finger at one event or influence, Japan is playing a role in market ructions right now.

It has been in and out of recession ever since the 1987 market collapse, which it then backed up with a bursting of the world’s biggest ever property bubble.

At one stage, the Imperial Palace in Tokyo — which takes up less than 3.4 square kilometres — was worth more than the entire state of California.

Japan pioneered the whole concept of Quantitative Easing or money printing, to pull itself out of an economic mire in the 90s, and has been flirting with zero per cent interest rates ever since.

It even missed the whole inflationary-induced interest rate spike we’ve been suffering from for the past two years.

But a few months back, it suddenly seemed as though its economy was entering back into the real world.

It finally had some inflation and — a few weeks ago — decided it could raise rates into positive territory.

That whacked its stock market, stopped global investors borrowing yen to invest around the world and saw the yen go for a massive run.

So why was trade on the ASX not so bad on Tuesday?

After beginning the morning flat, Australian shares pushed higher over the course of Tuesday’s trading session, continuing to rally after the RBA announced interest rates would remain on hold at 4.35 per cent.

It came as some analysts described Monday’s sell-off on global markets as possibly an “overreaction”.

“I think probably it is a bit of an overreaction, a disproportionate response to what was a weaker than expected jobs report in the US on Friday night,” EY’s chief Cherelle Murphy told AM.

On Tuesday, it appeared as if overseas investors were on the hunt for “bargains” — and many were swooping in to “buy the dip”.

Share markets in South Korea and Japan, which rebounded 9 per cent, clawed back some of yesterday’s losses.

And it seems as if US markets are set to follow.

What does this mean for Australians?

David Taylor had this analysis: The market sell-off in recent days doesn’t mean much at all if this is where it stops.

Equity markets (shares) rise over time. So for longer-term investors (and if you have superannuation you’re a longer-term investor), it’s water off a duck’s back.

But if the market volatility continues, it has the potential to cause serious damage to superannuation balances.

What does this actually mean for super?

Here’s Taylor again: Superannuation balances come in all shapes and sizes.

Some are very conservative and have all their money tied up in cash. They are, of course, largely unaffected by market ructions.

It all depends on one’s “risk appetite”. Or put another way, how well your nervous system can handle big market moves.

If you’re young, and you’re keen to take on plenty of risk, and your superannuation is heavily weighted towards “growth” stocks, then your balance probably took a bit of a hit yesterday.

Does that matter? Probably not if you’re 30 years off retiring.

But what if you have a shares-heavy portfolio and you’re approaching, or in, retirement?

Well, the same would be true about taking a hit. Those with a “balanced” or more diversified superannuation fund might find they took a bit less of a hit yesterday.

So, in short, if your superannuation balance is heavily tied to the share market then, yes, of course, it’s likely lost value over the past couple of days.

But it’s worth noting that nobody knows definitively how global financial markets will track in coming days or weeks.

History shows that, like the stock market, super balances can rebound from losses.

What does this mean for interest rates?

The Reserve Bank of Australia (RBA) announced it was keeping interest rates on hold at 4.35 per cent in its six-straight meeting.

The decision came amid the dramatic spike in volatility in financial and stock markets.

But Governor Michele Bullock’s statement suggested inflation, not market upheaval, was still the main focus for the RBA when it came time to make its decision.

She said the board has ruled out any interest rate cuts in the “near-term”.

“So based on what I know today and what the board knows today, what we can say is that a near term reduction in the cash rate doesn’t align with the board’s current thinking,” she said.

“We’ve seen from overseas experience how bumpy inflation can be on the way down and across the economy.

“We need to see demand and supply coming back into better balance.”