US stock market indices fell by more than 2 per cent overnight on Tuesday, with the US S&P 500 dropping 2.23 per cent and Nasdaq falling 2.74 per cent.
Speaking to InvestorDaily, AMP Capital senior economist Diana Mousina said the fall was attributable to a combination of geopolitical uncertainty as well as a correction in overvalued US tech stocks.
“The key thing that's really driving investor sentiment at the moment is uncertainty and concerns about how the trade issues between the US and China, and more broadly US and rest of the world, will progress over the next few months,” Ms Mousina said.
“Investors are being concerned about the fact that China is retaliating more than what they were saying about a week ago or so, indicating that they're going to put up a tariff on more goods than initially expected.”
But she added that the drop in the US equities market “does look a little bit overdone”.
“Even if those tariffs go through, from the Chinese perspective it’s not going to be a huge game changer,” Ms Mousina told InvestorDaily.
“It does mean that the world economy is moving towards a more protectionist stance more generally, but not going to cause huge ramifications for the US economy, or for China.
“We do still think the markets overreacted a little bit, but probably more to say investors are uncertain on how things will progress.”
Global equity markets look set to “generally recover from the downside” from the last number of weeks, but more volatility is on the horizon.
“The next few months are probably going to not be as positive for equities as they were at the very beginning of the year,” Ms Mousina said.
The “very high valuation levels” of major American technology companies had also experienced a correction, with the market responding to Facebook’s data breach, which had “flow[ed] through” to other companies and affecting the entire sector.
“You might see some more pressure on that side of the market in the US, which is a really big portion of the index for the US,” Ms Mousina added.
“So we prefer to have exposure to markets outside of the US.”
There were still “very solid signs of global economic growth”, but she warned that we were “probably coming to the peak of that now”.
“Global growth has been very strong over the past year, and while it's still looking good, there doesn't appear to be any more significant upsides,” Ms Mousina said.
“It's probably going to occur that the global economy will start to slow over the second half of the year, and the risks around global trade just confirms that that slowing is more likely than not to happen.
“But that's more of a story for the second half of the year.”
