Tue. Nov 5th, 2024
Occasional Digest - a story for you

The Australian share market has entered a “technical correction”.

A technical correction is a bit of financial markets jargon for a market fall, from a recent peak, of 10 per cent or more.

The S&P/ASX200 hit an all-time high of 7,628 in August 13, 2021, and a peak of 7,558 on February 3rd this year.

Today, the benchmark share index — the one that tracks a shopping list of stocks on the Australian Securities Exchange — fell 0.82 per cent to close at 6,844.

It means the index is down 10.3 per cent from its all-time high, and 9.5 per cent from its peak in February.

Indeed, the share market didn’t charge through the “correction” trigger today, it simply hovered around it — unsure of where to proceed.

Diversified energy company New Hope Corporation led today’s falls retreating 9 per cent, while resources firm Pilbara Minerals dropped 7 per cent.

Threat of war

An Israeli ground invasion of Gaza is imminent. A ground invasion has the potential to ratchet-up the seriousness of the geopolitical risks in the Middle East.

A Middle East war involving Iran and Saudi Arabia has the potential, apart from the obvious human tragedy, to lead to a sustained oil price shock.

This would move through the global economy like a wrecking ball.

“The next table looks at the major events that led to the Geopolitical Risk Index spiking to historical extremes and initial market reactions in the US S&P500,” AMP’s deputy chief economist Diana Mousina said.

Event

Date of US market bottom

US equity drawdowns from the event

US equity return 12 months after

World War 1

October 31, 1914

-18.5pc

37.9pc

World War 2

June 10, 1940

-31.7pc

9.2pc

Gulf War

January 17 1991

3.7pc

27.7pc

9/11, Invasion of Afghanistan

September 21, 2001

-11.6pc

12.5pc

US Invasion of Iraq

March 31, 2003

-3pc

32.9pc

Russia-Ukraine War

March 8, 2022

-1.3pc

-4.3pc

Israel-Hamas War

-2pc (so far)

Average

-10.4

15.2

“This shows that the major geopolitical events are often associated with moderate [sell-offs] in US shares with the six major events highlighted in the table leading to an average of a 10 per cent fall in US shares as an initial market reaction to the event.

“However, it’s important to keep in mind that there are economic factors at play that are also influencing returns, alongside geopolitical risks.

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