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Markets dive as global storm warnings mount
Scott Murdoch
From: The Australian
February 06, 2010 12:00AM
GLOBAL stockmarkets plunged yesterday as the prospect of a European debt crisis, a weakening US economy and concerns China will crunch its economy's growth too rapidly triggered a massive reassessment of investment strategies.
The Australian market slumped to its lowest point for five months, with investors wiping $30.83 billion off the value of shares as the benchmark S&P/ASX 200 fell 2.4 per cent or 107.5 points to 4514.1 and the All Ordinaries fell 111.4 points to 4532.7.
The market has now fallen 7.4 per cent this year with $104.25bn clipped from the capitalisation of companies.
The Australian dollar also fell victim to the rapid turn in market sentiment, and dropped to its lowest level for four months at US86.70c, down 1.63 per cent from the previous close of US88.14c.
The sudden bout of risk aversion sent Hong Kong's Hang Seng index down 3.3 per cent and Tokyo's Nikkei down 2.89 per cent and came after Wall Street plunged 268 points or 2.6 per cent -- its biggest fall in nine months -- on Thursday, raising fears the world had not seen the last of the economic crisis. Offshore markets are becoming increasingly concerned that Greece, Portugal and Spain risk not being able to finance their budget deficits.
The increasing risk of default frightened global credit markets, and the cost of insuring Australian sovereign debt blew out from 36 basis points to 50 -- the highest since August last year.
The fears also cast a renewed light on the strength of the global banking system, as credit default swaps on the world's biggest banks ballooned.
Those of Australia's banks hit 90 basis points, the most in almost a year, and are likely to add pressure to their funding costs.
The commodities markets were also sold off in the rush, with crude oil off 5 per cent, gold down 4.4 per cent and copper at the lowest point in three months.
The sell-off in US stocks sent Wall Street's favourite measure of investor anxiety, VIX, sharply higher as investors scrambled for protection.
The index jumped nearly 21 per cent to 26.08 as stocks sank.
Morgan Stanley Smith Barney vice-president Fabiola Gibson said the potential debt crunch in Europe had prompted markets to re-evaluate risk appetite.
"We are seeing a repricing of risk," Ms Gibson said.
"It's the credit markets that we are dealing with. We have seen the VIX blow out. This is a repricing of credit as a result of Greece, Portugal and Spain.
"Sentiment has been so dented by the global financial crisis that investors are more cautious and nervous than two years ago.
"It's probably too early to say that we are going back down and we're going to relive the crisis."
Credit Suisse analyst Damien Boey said fears were also being exacerbated by the US administration signalling it would begin to end its quantitative easing in March which could lead to demand for US bonds to dry up.
"I think this is a potential trigger for the next leg down," he said.
"The difference though between this and what we saw in 2008 was that 2008 was a train wreck in slow motion.
"This one, if it is a leg down, will be the result of policy error."
UBS institutional trader Rue Liu said the majority of selling pressure in Australian equities had come from overseas institutions exiting the local market.
"The pattern since the start of 2010 has been of net selling," Ms Liu said. "From the international side, they have made 40 to 50 per cent on equities and 20 to 30 per cent on the currency so they have started to take some money off the table. The domestic institutions have been marginal buyers. But they are in no hurry to make big bets ahead of the reporting season in Australia."
The Australian market overlooked a positive forecast from the Reserve Bank which yesterday upgraded its growth outlook for the domestic economy.
In its Statement of Monetary Policy, the RBA revealed annualised growth in June this year should reach 2.5 per cent compared to its previous forecast of 2.25 per cent. The central bank has also predicted growth into 2011 will be at 3.5 per cent, up on its previous call of 3.25 per cent.
The bank forecast core inflation will tumble from 3.25 per cent in December last year to as low as 2.5 per cent in June this year.
Citi's chief Australian economist Paul Brennan said that if the eurozone credit crunch deepened, it could delay the RBA from raising rates in the next two months as markets remained volatile.
"Should global credit conditions deteriorate, we would consider delaying the forecast for the next hike until the May meeting," Mr Brennan said.
"The sovereign problems in parts of Europe will have little direct economic impact on Australia. But in an indirect sense, the longer the market remains concerned about the positioning of some sovereigns, the greater the chance that this will pass through in a sustained way into wholesale funding costs that will influence Australian financial conditions."
Scott Murdoch
From: The Australian
February 06, 2010 12:00AM
GLOBAL stockmarkets plunged yesterday as the prospect of a European debt crisis, a weakening US economy and concerns China will crunch its economy's growth too rapidly triggered a massive reassessment of investment strategies.
The Australian market slumped to its lowest point for five months, with investors wiping $30.83 billion off the value of shares as the benchmark S&P/ASX 200 fell 2.4 per cent or 107.5 points to 4514.1 and the All Ordinaries fell 111.4 points to 4532.7.
The market has now fallen 7.4 per cent this year with $104.25bn clipped from the capitalisation of companies.
The Australian dollar also fell victim to the rapid turn in market sentiment, and dropped to its lowest level for four months at US86.70c, down 1.63 per cent from the previous close of US88.14c.
The sudden bout of risk aversion sent Hong Kong's Hang Seng index down 3.3 per cent and Tokyo's Nikkei down 2.89 per cent and came after Wall Street plunged 268 points or 2.6 per cent -- its biggest fall in nine months -- on Thursday, raising fears the world had not seen the last of the economic crisis. Offshore markets are becoming increasingly concerned that Greece, Portugal and Spain risk not being able to finance their budget deficits.
The increasing risk of default frightened global credit markets, and the cost of insuring Australian sovereign debt blew out from 36 basis points to 50 -- the highest since August last year.
The fears also cast a renewed light on the strength of the global banking system, as credit default swaps on the world's biggest banks ballooned.
Those of Australia's banks hit 90 basis points, the most in almost a year, and are likely to add pressure to their funding costs.
The commodities markets were also sold off in the rush, with crude oil off 5 per cent, gold down 4.4 per cent and copper at the lowest point in three months.
The sell-off in US stocks sent Wall Street's favourite measure of investor anxiety, VIX, sharply higher as investors scrambled for protection.
The index jumped nearly 21 per cent to 26.08 as stocks sank.
Morgan Stanley Smith Barney vice-president Fabiola Gibson said the potential debt crunch in Europe had prompted markets to re-evaluate risk appetite.
"We are seeing a repricing of risk," Ms Gibson said.
"It's the credit markets that we are dealing with. We have seen the VIX blow out. This is a repricing of credit as a result of Greece, Portugal and Spain.
"Sentiment has been so dented by the global financial crisis that investors are more cautious and nervous than two years ago.
"It's probably too early to say that we are going back down and we're going to relive the crisis."
Credit Suisse analyst Damien Boey said fears were also being exacerbated by the US administration signalling it would begin to end its quantitative easing in March which could lead to demand for US bonds to dry up.
"I think this is a potential trigger for the next leg down," he said.
"The difference though between this and what we saw in 2008 was that 2008 was a train wreck in slow motion.
"This one, if it is a leg down, will be the result of policy error."
UBS institutional trader Rue Liu said the majority of selling pressure in Australian equities had come from overseas institutions exiting the local market.
"The pattern since the start of 2010 has been of net selling," Ms Liu said. "From the international side, they have made 40 to 50 per cent on equities and 20 to 30 per cent on the currency so they have started to take some money off the table. The domestic institutions have been marginal buyers. But they are in no hurry to make big bets ahead of the reporting season in Australia."
The Australian market overlooked a positive forecast from the Reserve Bank which yesterday upgraded its growth outlook for the domestic economy.
In its Statement of Monetary Policy, the RBA revealed annualised growth in June this year should reach 2.5 per cent compared to its previous forecast of 2.25 per cent. The central bank has also predicted growth into 2011 will be at 3.5 per cent, up on its previous call of 3.25 per cent.
The bank forecast core inflation will tumble from 3.25 per cent in December last year to as low as 2.5 per cent in June this year.
Citi's chief Australian economist Paul Brennan said that if the eurozone credit crunch deepened, it could delay the RBA from raising rates in the next two months as markets remained volatile.
"Should global credit conditions deteriorate, we would consider delaying the forecast for the next hike until the May meeting," Mr Brennan said.
"The sovereign problems in parts of Europe will have little direct economic impact on Australia. But in an indirect sense, the longer the market remains concerned about the positioning of some sovereigns, the greater the chance that this will pass through in a sustained way into wholesale funding costs that will influence Australian financial conditions."
http://www.theaustra...x-1225827278524
This post has been edited by Silver Surfer: 05 February 2010 - 10:55 PM
