Australia is currently in its 28th consecutive year of reporting economic growth. Moreover, according to predictions by the International Monetary Fund (IMF), Australia - the only country, globally, to have delivered a solid economic performance and maintained this long-period of uninterrupted economic growth - would outperform every other economy between 2019 and 2023.
However, it seems challenges are ahead for the Australian economy, which might fail to maintain its record performance. The benchmark index on the Australian Securities Exchange (ASX), S&P/ASX 200 fell 2.5 per cent on 06 August 2019 and closed at 6478.1, this comes on back of a 1.9% fall on Monday, 05 August 2019. The two-day gash in prices saw investors’ wealth erode by the billions, owing to escalating trade war between the United States and China.
Below graph depicts the steep fall in the performance of the benchmark index ASX 200.
Source: Thomson Reuters
Escalation of Trade War
Trade tussle between the two biggest economies of the world – United States and China – is expected to further intensify and result in a significant damage to an already weakening global economy. United States President Donald Trump, on 01 August 2019, announced plans to hit China with a 10 per cent tariff on another $ 300 billion worth of goods. The new tariff, planned to come into force on 01 September 2019, would mean every year, approximately $ 550 billion worth of Chinese goods bought by the US would be targeted with tariffs. The announcement stunned the financial markets as well as abruptly broke a brief ceasefire in the trade tensions. The new tariffs are expected to hit hard several countries including Australia.
It seems by continuously punishing China, President Trump expects China to negotiate; however, the Asian country is backfiring. On 05 August 2019, the Chinese currency Yuan dropped to its lowest level since 2008, marking a pronounced escalation in the US-China trade war. The Chinese Yuan broke through 7 against the US dollar for the first time in more than a decade, after the People’s Bank of China, the central bank of China, set the midpoint for the daily trading band of the yuan at 6.9225 each dollar. The government’s move to allow the currency to break down was termed as a “currency manipulation” and a “major violation” by the American president. However, PBOC denied of pushing the currency down. Meanwhile, according to market reports, the Chinese government has asked state-owned companies to stop buying agricultural goods from the US.
The escalating trade war isn’t good for anyone, whether it is China, United States or the global economy. A weaker Chinese currency and a stronger US dollar would result in challenges for American companies that are engaged in substantial business with China. Moreover, the devaluation of yuan is sparking fears of further escalation in the trade tensions between the world’ two biggest economies, as Mr trump has always been critical of China using its currency to get an advantage in trade.
The further escalation in trade war has renewed concerns among global financial markets regarding how much the Asian country would allow its currency to weaken in order to get a relief from growing pressure from the increasing US tariffs. Additionally, market experts are predicting possible sanctions by the US against Beijing. In 1994, the United States put the Asian country on the currency blacklist.
Worst Performers on Australian Stock Exchange
The devaluation of Chinese Yuan had a major impact on the stocks trading on the ASX, as well as on other stock exchanges in the region, with several investors viewing the currency devaluation a direct response to the new US tariffs. Growth stocks on Monday, 5 August 2019, were at the receiving end, amid investors seeking to ward off riskier stocks. Over ~$ 35 billion were wiped from the ASX boards, after several stocks reported steep declines in their price.
Major losses on the ASX were led by mining players BHP Group Limited (ASX: BHP), Rio Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG). Monday was a rough morning for investors in major tech players, as several tech companies trading on the ASX including Afterpay Touch Group Limited (ASX: APT), Xero Limited (ASX: XRO), Appen Limited (ASX: APX) and WiseTech Global (ASX: WTC) reported significant fall in their share price. Moreover, on 6 August 2019, APT closed at $ 22.340, down 4.936 per cent, XRO closed at $ 59.970, down 5.988 per cent, APX closed at $ 25.900, down 3.61 per cent, and WTC closed at $ 26.950, down 8.02 per cent.
Australia’s four national banks - Westpac Banking Corporation (ASX: WBC), Australia and New Zealand Banking Group Limited (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Limited (ASX: NAB) - traded at a significant lower price on 5 August 2019. On 6 August 2019, WBC, ANZ, CBA and NAB closed the day’s trade at $ 27.730, down 2.599 per cent, at $ 26.720, down 2.61 per cent, at $ 79.800, down 1.736 per cent and at $ 27.510, down 2.274 per cent, respectively.
What to Watch Out in Australia?
- RBA Meeting: The Reserve Bank of Australia (RBA) is scheduled to hold a meeting on its monetary policy on 6 August 2019. Any monetary policy change decision might further impact the market.
- Iron ore: Fall in the price of mining players mentioned above was also impacted by declining iron ore prices. Recently on 2 August 2019, iron ore prices reported a heavy fall, owing to lower prices of steel leading to a fall in its demand in China. If the iron ore price fails to stabilise, there are chances of further impact on the market. China, one of the major economies in the world, is the biggest trading partner of Australia. Moreover, the Asian country is a major buyer of iron ore from Australia.
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