ASX plunges 4%, global stocks slump on recession fears

The Australian share market has plunged more than 5 per cent in the first 20 minutes of trade, wiping tens of billions of dollars off the value of the country's top companies after global markets sank on worries of more aggressive interest rate hikes by the US central bank.

This slump represents the biggest percentage loss in a single day since March 2020 with $116 billion wiped off the value of the All Ordinaries index by 11am 14-06-22..

The market has come off its lows but it's still down.

All Ordinaries are down by 5% to 6,786, while the ASX 200 is down nearly 5% to 6,591.

It's the biggest market fall since March, 2020 during the height of the pandemic.

Tech stocks are leading the falls after being on Wall Street. That's because tech firms depend on cheap borrowing to expand their business.

How likely is it Australia will enter another recession?

A recession is possible in Australia if the Reserve Bank raises interest rates too quickly and that causes a sudden slowdown in the economy.

Aggressive interest rate hikes make the cost of borrowing more expensive. That basically stops lending in its tracks because the cost paying back a mortgage has suddenly jumped by hundreds of dollars a month (depending on the size of your mortgage).

It also means that businesses are less reluctant to borrow because interest rates are higher.

So that is how higher interest rates curb inflation by making the cost of living more expensive. Higher prices means that people stop spending so much.

So in short a recession is possible but the RBA could ease off on its aggressive hikes. But it hasn't so far. The "supersized" rate rise earlier this month of 0.5%to 0.85% had alot of economists shocked at how hawkish the RBA is being amid accusations they should have acted sooner.

But it was hard for them to act sooner because the war in Ukraine is really destabilising the world.

Why does the ASX slide so dramatically because of news out of the US?

Global share markets are connected because of the globalisation of the world's financial system and global trade.

Economies and share markets are based on confidence and Australia gets also a lot of its capital (finance to expand businesses and fund government) from overseas.

Australia is also a major commodity exporting nation so when commodity prices fall, the Australian share market falls.

That is because miners and banks are the heavy weights on the market. So, essentially, Australia relies on the rest of the world for its economic functioning, so when Wall Street sneezes, we get a cold.

What does it all mean?

Superannuation returns have been hit, business confidence is down, people feel less financially secure and they worry when they see a bear market.

It's a sign that investors think a recession is pending.

Remember: economies and share markets are all about confidence.

Why are stocks falling?

Stocks are falling because investors are worried that a global recession is imminent.

That's because central banks are rapidly raising interest rates to counter surging inflation here and overseas.

Rising interest rates crimp rising prices but they also curb growth because they make the cost of borrowing more expensive.

Global sharemarkets have been at record highs because of the stimulus pumped into the global financial system and economy to counter the impact of the COVID-19 pandemic.

Story By | Jessica Riga & Sue Lannin