A fundamental shift in the global investment landscape appears to be underway, as fears of a financial markets meltdown spread. This story begins on Wall Street, where traders have dramatically altered their expectations regarding the Federal Reserve’s upcoming interest rate decision. The market now perceives less than a 50% chance of a US interest rate cut on December 10. Adding to the uncertainty, the recent US government shutdown has delayed the release of critical economic data, obscuring the true state of the US economy.
This uncertainty has significant implications for millions of Australians, particularly those nearing retirement and mortgage borrowers. The anxiety and fear pervading financial markets led to substantial declines, with the benchmark S&P/ASX 200 index shedding 1.5%, equivalent to approximately $37 billion, on Friday. This followed a 0.5% drop on Thursday and smaller declines earlier in the week.
Market Concerns and Potential Triggers
Shane Oliver, AMP’s head of investment strategy, who manages billions in investments for superannuants, has outlined several reasons why the market could experience further declines. These include expensive valuations, concerns about a bubble in AI shares, and the excessive reliance of the US share market on these stocks. Additionally, uncertainty surrounding central bank interest rate cuts, particularly in the US and Australia, and the lagged impact of former President Trump’s tariffs contribute to the market’s unease.
Oliver also highlights excessive public debt levels in several countries and ongoing geopolitical risks as factors that could exacerbate market volatility. However, he notes some positive aspects, such as strong profit growth in the US and a temporary reduction in trade tensions between the US and China.
“Profits notably in the US are still rising strongly. The further trade truce between the US and China has reduced risk on this front for a while,” Oliver says.
Fears of an AI ‘Bubble’
The performance of the US tech sector could heavily influence whether the market experiences a significant downturn. Many analysts argue that investment in the leading US technology companies represents a bubble, with price increases not reflecting the earnings potential of these firms. Notably, several big tech companies, including Oracle, are accumulating debt to fund their investments.
“We struggle to see an avenue for [Oracle’s] credit trajectory to improve,” CNBC reported on a Barclays’ note to clients.
Concerns about the overvaluation of the US tech sector are growing, with some experts predicting a correction—defined as a decline of 10% or more from a recent peak. Anna Wu from VanEck Australia cautions that short-term weakness could occur, especially if Nvidia’s earnings disappoint next week.
Charlie Jamieson of Jamieson Coote Bonds describes the growing tech debt as a “major issue,” emphasizing the reliance on AI success and debt financing for capital expenditures. Marc Sumerlin, a potential candidate for the next US Federal Reserve chair, warns that AI investments are increasingly funded by debt rather than cash flow, raising bubble concerns.
“I think we are in the beginning of a bubble forming,” Sumerlin warns.
The Broader Economic Impact
Some analysts believe the long-anticipated end of a multi-decade bull run is approaching, driven by a fundamental shift in interest rate expectations. Inflation in both Australia and the US remains uncontained, and future economic growth could further fuel price increases. Higher interest rates exert downward pressure on stock prices, as investors demand greater returns on their investments.
The lack of economic data due to the US government shutdown compounds the uncertainty, paving the way for a potential market sell-off. Jimmy Tran, a dealing manager at Moo Moo, notes that Wall Street traders are bracing for a flood of data now that the government has reopened, questioning whether the reports will prompt the Federal Reserve to consider a rate cut.
“That’s not looking certain for December and we’re seeing investors reposition accordingly,” Tran wrote.
Henry Jennings, a senior portfolio manager at Marcus Today, candidly states that a market correction has already begun, with further downside expected. Shane Oliver concurs, suggesting that while the risk of a further pullback is high, a more severe decline may not occur until next year.
Implications for Mortgage Borrowers and Retirees
The uncertainty surrounding interest rates poses a significant challenge for Australian mortgage borrowers, as the hurdle for another Reserve Bank rate cut is now higher. Inflation in Australia has moved beyond the RBA’s target band, and while the job market is slowing, it remains relatively tight. The US faces similar challenges, with fears of a rising unemployment rate.
If investors panic about stock prices at this stage, a financial market shock could ripple through the economy. The lack of official economic data in the US heightens anxiety, as policymakers remain uncertain about the nation’s ability to withstand such a shock. More than $4 trillion in Australian superannuation savings, much of which is invested in US stocks, particularly the tech sector, is also at stake.
As the global investment landscape continues to evolve, stakeholders will closely monitor developments in interest rates, economic data releases, and the performance of key sectors to navigate the uncertainties ahead.
