S&P/ASX200: Donald Trump's second honeymoon sets rocky markets scene

Four weeks was all it took to wipe more than $240 billion from the Australian share market’s top 200 $2.8 trillion combined market cap.

The S&P/ASX200 has been heading south since hitting an all-time high on Valentine’s Day and has lost roughly 10 per cent since.

Anemic earnings, particularly in Australia’s big four banks, followed by an unwind of outperforming US equities and tech giants from potentially over-extended price levels kicked-off what looked like a necessary minor correction.

With markets already trading downwards, US president Donald Trump poured fuel on smouldering market uncertainty by imposing, delaying, doubling and threatening new tariffs on top trading partners Canada, Mexico and China.

But he wasn’t finished.

With the S&P500 down more than six per cent from its highs, Mr Trump refused to rule out a US recession in the wake of his trade war and gutting of government spending.

“I hate to predict things like that,” he said last Sunday.

“There is a period of transition because what we’re doing is very big.”

On Monday, Wall Street tumbled and the local bourse followed it into the red three days in a row.

And there could be more downside to come, according to CommSec chief economist Ryan Felsman.

“It’s difficult to say, because we’re kind of trading on a headline minute by minute, hour by hour, day by day proposition,” Mr Felsman told AAP.

Roughly $242 billion was wiped from the ASX200’s market cap this week alone, after posting 15 declines in the past 20 trading sessions.

“Certainly at the moment, it’s looking oversold but it could have a bit further to go,” Mr Felsman says.

Trump has indicated that he wants to finalise policy around April’s incoming tariffs which, although they might be inefficient, would at least be a known quantity for investors.

“After that we should see the US start to focus on some of their other objectives, which is around tax cuts for personal income tax payers and also businesses,” Mr Felsman says.

“That could provide some support for the US economy but also for the share market.”

New 25 per cent tariffs on steel and aluminium imports to the US were imposed on Wednesday without exception, igniting a war of words about how and if Australia should respond.

While the $1 billion in Australian steel and aluminium imports, and the 20,000 workers who could be impacted by tariffs was a concern, the trade amounts to about 0.2 per cent of total exports.

A bigger worry would be how a broader trade war could affect Australia’s closer trading partners.

“If we do see a slowing in the US, they will put downward pressure on global growth more broadly, and those trade flows will be impacted by increased protectionism,” Mr Felsman says.

China’s growth prospects prompt further disquiet.

“At least as big a worry as a self-induced US recession is the possibility of further weakness or stagnation in China because China takes 36 per cent of our exports, the US takes four,” independent economist Saul Eslake told AAP.

So far the Australian government has opted not to take retaliatory actions, although the US threat of taxing more valuable exports such as beef could still be on the table from April 2.

“The government is absolutely correct to say we’re not going to retaliate, right?” Mr Eslake says.

“You know, retaliation is circular firing squad stuff.”

“My mum used to say, ‘Just because your sister puts her head down the toilet doesn’t mean you should do it too’.”

Mr Eslake likewise says a US recession doesn’t necessarily mean one in Australia, citing the early 2000s dot-com bubble and 2008 global financial crisis.

“I’m not saying the probability of a US recession or a recession here is over 50 per cent but it’s not zero and it’s going up and it will not be a recession anyone had to have,” he says.

“It will be a Trump recession, engineered by stupid economic policies.”

Wall Street managed a positive session on Wednesday after inflation data came in cooler than expected but the February print obviously pre-dated the imposition of tariffs, which will drive up prices for US consumers and any producers that import parts from abroad.

“The (US) inflation numbers are going to get worse,” Mr Eslake says.

“The economic numbers are going to get worse and markets will react to that until they have reason to think there’s a turning point at some point in the future, and there’s no reason to think.”

AMP chief economist Shane Oliver sees recent weeks as harking back to another era.

“It’s just like we’ve gone back to the way things were before I started my career,” Dr Oliver told AAP.

“Industry protection just results in industries which are not as efficient as they could be, whereas global competition keeps businesses on their toes and competitive.”

In the 1930s, massive tariffs imposed in the US by the so-called Smoot and Hawley Act extended and deepened the Great Depression.

“We haven’t learned any lessons from this. We’re repeating history in a way,” Dr Oliver adds.

“But the context is completely different.”