ASX turmoil to continue as bear market looms

Australian shares are set for a fall of close to 2 per cent on Monday following another rout on global markets on Friday night, as Brent crude oil crashed to 12-year lows, doubts about China's economy continued and data for US sales and manufacturing came in softer than expected.

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US stocks take another beating

Equities face relentless selling pressure amid ongoing worries about falling oil prices and weakness in China.

The Australian sharemarket – as with global equities in general – has endured its worst start to a year on record, with the benchmark ASX200 index already losing 7.6 per cent, dragging it down to mid-2013 levels. 

That could be extended to more than 9 per cent on Monday, with a strong possibility of the index trading beneath 4800 points.

The benchmark S&P/ASX 200 index dropped 0.1 per cent to 5361.9, while the broader All Ordinaries fell 0.1 per cent to 5437.4.
The benchmark S&P/ASX 200 index dropped 0.1 per cent to 5361.9, while the broader All Ordinaries fell 0.1 per cent to 5437.4. Photo: Peter Riches

Australia, along with other countries, is now officially close to bear market territory – defined as a 20 per cent drop on 2015 highs. 

Eurozone shares are officially in bear market territory, with a decline of 20.4 per cent from their 2015 high, Australian and Japanese shares are down 18 per cent and US shares are down 12 per cent.


Worries about China, concerns about global and emerging market growth, and plummeting commodity prices – led by oil – have all fuelled the current turmoil, said AMP Capital chief economist Shane Oliver.

Consequently, Chinese economic data out on Tuesday will be the main focus for the week ahead, he said.

Dr Oliver said Chinese December quarter growth would come in around 6.9 per cent year-on-year and 6.9 per cent for 2015 as a whole. "The overall impression is expected to be one of stable as opposed to collapsing growth."

And further sharemarket turmoil could be expected, he said. "With worries about global growth likely to linger we could still see some more downside in sharemarkets in the short term that could see developed markets, including Australian shares, follow emerging markets into a bear market," he said.

However, said Dr Oliver, there were five upbeat facts to consider amid the current carnage.

First, economic data over the past week has been mostly OK, "although the softness in US December retail sales is a concern".

Second, the plunge in the Chinese Renminbi, which brought about last week's dramatic falls in the sharemarket, appeared to have stabilised "for now".

Third, sentiment is starting to get extremely negative. The Royal Bank of Scotland, for example, issued a note telling investors to "sell everything".

"This is a sign we may be getting close to the capitulation that usually presages market bottoms."

Fourth, while the plunge in oil prices is bad for suppliers, it was great news for consumers. Dr Oliver cited a Deutsche Bank paper stating that markets were underestimating the upside risk to growth in the US, Japan and Europe as a result of the oil prices. 

"It is a significant growth boost operating in the other direction to all the gloom and doom now building up". 

Lastly, central banks in the developed world still had power to act – if not by outright easing, then by "sounding more dovish".

"I remain of the view that the Fed will struggle to put through the four rate hikes for this year ... two at best but the risk is one or none."

Citigroup chief economist, New York-based Willem Buiter, said in a note to clients that "China-driven volatility in financial markets is likely to be as present in 2016 as 2015 or more so".

"The weakness in, and uncertainty around, the renminbi and Chinese growth are disinflationary and weaken demand growth in the rest of the world." 

Commsec chief economist Craig James said that the world's major central banks needed to step up and show leadership.

"The sharemarket slide over 2008/09 was largely repaired over 2009/10," he said.

"It gets down to central banks and how committed and effective they are in engineering recovery. 

"Unfortunately in recent months they haven't exhibited the same degree of leadership."

Mr James noted that the Federal Reserve would not have lifted interest rates unless the US economy was in good shape. However, the US sharemarket was overvalued and in need of correction, he said.

"The forward price-earnings ratio for the Standard and Poor's 500 stands at 16.5. The long-term average is 15," he said.

"The US may want to blame China for the volatility but share prices are still too high in relation to earnings."