Australian Share Market Enters Technical Correction Amidst Geopolitical Risks
Will the share market weather the storm of geopolitical risks and economic uncertainties?
The Australian share market has experienced a significant drop, signaling a technical correction. This term refers to a market fall of 10% or more from a recent peak. Today, the benchmark share index fell by 0.82%, closing at 6,844. With the index down 10.3% from its all-time high and 9.5% from its peak in February, uncertainty looms over the market’s future.
The share market today did not charge through the correction trigger but rather hovered uncertainly around it. This hesitation reflects the market’s lack of direction amidst prevailing geopolitical uncertainties.
The threat of an Israeli ground invasion of Gaza adds to the seriousness of geopolitical risks in the Middle East. Such a conflict, along with potential involvement from Iran and Saudi Arabia, could result in a sustained oil price shock, impacting the global economy significantly. This scenario could be likened to a wrecking ball, causing widespread economic disruption.
Historical data reveals that major geopolitical events often lead to moderate sell-offs in the US share market. For instance, events like World War 1, World War 2, and the Gulf War resulted in an average 10% fall in US shares initially. However, it is essential to consider economic factors that coexist with geopolitical risks and influence market returns.
The ongoing conflict in Israel occurs while US bond yields reach their highest levels since 2007. This conjunction, coupled with the effects of the pandemic economic stimulus and reopening of borders, has led to a notable increase in inflation. This inflationary trend, combined with the potential for higher oil prices due to the war, has raised concerns about extended periods of higher interest rates.
The uncertainty surrounding global share markets is understandable given the current circumstances. If bonds offer a more attractive return compared to shares, investors may opt for the safer option. Moreover, the Middle East conflict and the potential impact on oil prices could contribute to economic slowdowns. With low trading volumes, many investors choose to remain on the sidelines and wait for favorable economic and political conditions.
Investing in the share market inherently carries risks. However, when alternative investments provide similar returns with lower risks, there is a possibility of a rush to exit the share market. Additionally, the increased risk of recession in Australia and the US, uncertainties surrounding China’s economy and property markets, and the looming threat of a US government shutdown all contribute to market volatility.
While it is impossible to predict the exact future of the share market, it is expected to remain volatile given the current geopolitical risks, inflationary pressures, and unpredictable human behavior. Younger Australian investors may view this market correction as a buying opportunity, while older individuals with significant share investments may experience anxiety. However, financial services giant AMP suggests that the next 12 months could see a decrease in inflation pressure and central banks taking measures to stabilize the market, potentially leading to reasonable share market returns if any recession is mild.
- The Australian share market has entered a ‘technical correction,’ indicating a 10% drop from its recent peak.
- The benchmark share index fell by 0.82%, closing at 6,844.
- Uncertainty surrounds the market as it hovers around its correction trigger.
- Geopolitical risks, such as the potential Israeli ground invasion of Gaza, contribute to market instability.
The Australian share market is experiencing a technical correction amidst escalating geopolitical risks. The uncertainties surrounding the market’s future, the ongoing conflict in the Middle East, and the potential impact on oil prices all contribute to market instability. With inflationary pressures and unpredictable human behavior, the share market is expected to remain volatile. However, there may be opportunities for investors in the coming months if inflation eases and central banks take measures to stabilize the market.