Market correction shows uncertainty in global economy

The global share markets appear to be correcting as the ASX on Monday dropped below the one-year lows briefly touched last week, closing 54.5 points, or 0.8%, lower at 6772.9.

The global share markets appear to be correcting as the ASX on Monday dropped below the one-year lows briefly touched last week, closing 54.5 points, or 0.8%, lower at 6772.9.

This follows the S&P500, which fell into correction territory last week, shedding 2.5% for the week to put it down by more than 10% from its 2023 closing high. The key U.S. index is down 2.8% for October and looking likely to have its third-straight negative month, which would be its first such streak since 2020 when the global pandemic struck.

Reasons speculated for the correction have included the conflict between Israel and Hamas, with fears it could spiral into a regional war, sending investors away from equities.

Another reason could be surging interest rates due to high global inflation, which is expected to reach 7% in 2023, after hitting 8.75% in 2022. The Federal Reserve is expected to keep rates the same in its Wednesday meeting, while the RBA has its next rate meeting next Tuesday, with a 50% expectation of an interest rate increase to 4.35%.

However, the correlation between high bond yields and weaker equity markets, which is typically seen in a correction, has been rather delayed, making it tricky to predict whether this is a short-term blip or a sign of a global recession.

While bond yields have been rising since May, it is only in the past eight weeks that the markets have taken notice, with nearly 75% of the correction since January occurring since the start of September.

The 10-year Treasury yield jumped above 5% to start last week, but it traded around 4.89% on Monday.

In addition, consumer spending in Australia and the U.S. has been strong, which is often an indicator of a strong economy and rising markets. Retail sales in Australia grew a stronger-than-expected 0.9% seasonally adjusted in September, while consumer spending in the U.S. grew by 4% for the third quarter, year-on-year, the best result in two years

Friday’s October jobs report will be a good gauge of the health of the U.S. labour market, and, in turn, whether the Federal Reserve will raise interest rates or keep them steady.

With such conflicting economic data, markets continue to be quite volatile, in the short-term at least.

Past performance is not a reliable indicator of future performance.


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