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Donald Trump’s presidency has generated two “black swan” sharemarket events. His Liberation Day tariffs last year met that criteria, and he has done it again with the bombing of Iran, which has ruptured the world’s geopolitical and economic balance. Sharemarkets that provide a metric of this destructive disruption have turned chaotic.
Both events opened Pandora’s box with a potential re-emergence of inflation and interest rate rises – the sharemarket’s kryptonite.
And Australia – the first major sharemarket to trade since the weekend’s escalating bombing campaigns and continued closure of the Middle East’s major oil shipping route, the Strait of Hormuz – is providing an early glimpse of what will follow on Monday night when US markets open.
It will be a whiplash moment for investors in the Australian market, which was trading at a record high only a week ago and before that had been up by more than 5 per cent since the start of the year.
Bloomberg
On Monday, the ASX200 index reacted violently, dropping more than 4 per cent by lunchtime, which is an uncharacteristically large fall for our local bourse. Its broad-based wipeout, with more than $110 billion in value erased, set an ominous tone.
Over the next few hours, other markets fell like dominoes, starting with Japan and South Korea, which plunged 6.2 and 6.7 per cent, respectively. Hong Kong’s Hang Seng followed suit, falling 3.2 per cent at the open.
US futures suggest the market will be in for an uncomfortable ride when the Dow and S&P begin trading, pointing to a decline of about 2.5 per cent.
In Australia, we have witnessed only two other meltdowns of similar size in the past six years. The first was in response to the COVID pandemic, when the world economy was shrouded in uncertainty; the second followed the announcement of the Liberation Day tariffs.
The market’s collapse is a response to the soaring US benchmark oil price (the West Texas Intermediate), which topped $US110 a barrel; two weeks ago, it was $US61.
The last time the oil price reached these heights was when Russia invaded Ukraine.
The soaring oil price, if sustained, could feed into inflation and perversely lead to lower economic growth. Neither of these outcomes would be good for equity markets.
Extracting the markets from this turmoil requires a TACO movement – “Trump Always Chickens Out”. The presidential manoeuvre of backing down when his actions promote dire consequences – such as market meltdowns – has been a feature of the Trump presidency.
But at the weekend, Trump doubled down on his rhetoric, posting on social media that the US assault will continue until Iran capitulates.
“Iran is no longer the ‘Bully of the Middle East,’ they are, instead, ‘THE LOSER OF THE MIDDLE EAST,’ and will be for many decades until they surrender or, more likely, completely collapse!” Trump wrote.
Monday morning’s news that Iran had appointed Mojtaba Khamenei, a son of the recently killed supreme leader, as his father’s successor suggests it will eschew any move to back down, despite the US and Israeli bombardment.
This, in turn, provides less wriggle room for a Trump TACO move.
Investors who are bracing for the worst are wondering where to look for a circuit breaker.
Within the Australian market, the only sector in the black was our oil and gas stocks, with our largest producer, Woodside, trading higher in the afternoon.
The behemoths of the Australian market – including BHP, Rio and the banks – suffered share price routs.
The carnage was broad-based by lunchtime, with BHP slumping more than 6 per cent, the Commonwealth Bank down 4 per cent and Wesfarmers down 2.7 per cent.
Unsurprisingly, shares in our local airlines Qantas and Virgin were being hammered by fears on the back of travel disruptions resulting from the Middle East conflict and the escalating price of oil, which is one of their largest costs. Qantas fell 5.7 per cent on Monday and Virgin nosedived 9 per cent.
For spooked investors, it is time to hold on for the ride.
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