$50b question keeps investors guessing
More than $50 billion was wiped from the Australian market on Thursday and Friday.
First there were concerns that the US Federal Reserve might begin slowing its quantitative easing sooner than expected.
US Fed chairman Ben Bernanke confused markets when he made contradictory statements about the likelihood of tighter monetary policy in the world's biggest economy.
Late last year, Dr Bernanke deliberately tied US monetary policy to the country's unemployment rate, saying the Fed would only consider tightening policy when the unemployment rate approached 6.5 per cent. Since then unemployment has fallen by half a percentage point, to 7.5 per cent, but not enough to think Dr Bernanke would be considering slowing his bond-buying program.
But, on Thursday, he spooked markets by saying that if the US economy continued to improve, and if that improvement looked likely to be sustained, then "we could, in the next few meetings ... take a step down" in the pace of asset purchases.
The remark was not well received, particularly by investors who have become hooked on the promise of waves of new money washing around. The news hit bond markets, which reacted like a gong, and currency markets whipsawed, with the dollar plummeting US2¢ in a session to about US96¢ (it has now fallen US7¢ in three weeks). And while the dollar was shedding skin, on the same day the head of Ford dropped its bombshell.
For the week, the benchmark S&P/ASX 200 Index tanked 197.3 points, or 3.8 per cent, to 4983.5, while the broader All Ordinaries index lost 195.5 points, or 3.8 per cent, to 4964.3.
Aside from Dr Bernanke's comments, there were concerns about softer than expected manufacturing conditions in China, with HSBC's flash purchasing managers' index for May falling to 49.6, from 50.4 in April. Anything below 50 means manufacturing activity is contracting.
The big miners took a hit, with BHP Billiton, Rio Tinto, Fortescue Metals and Atlas Iron all slipping.
Then there were fears Japan's whispered-about recovery would be knocked off course by a back-up in bond yields. The Nikkei lost over 7 per cent on Thursday, but it recovered slightly on Friday. Japan's sharemarket is still up 40.5 per cent year-to-date, thanks to efforts by the Bank of Japan to pull the economy out of its deflationary hole.
For the week, Leighton Holdings gained 9¢ to $18.10 after it said it was not concerned about the recent woes of mining services companies.
Myer lost 18¢ to $2.49. The company's sales have grown slightly, but boss Bernie Brookes said he still remained cautious about the future of Australian retailers.
Seven West Media shed 26¢ to $2.10 after the US private equity firm KKR said it planned to sell its 12 per cent stake.
Frequently Asked Questions about this Article…
Markets fell after a mix of worrying and confusing news: US Federal Reserve chairman Ben Bernanke made remarks that suggested the Fed might slow quantitative easing sooner than expected, China’s HSBC flash manufacturing PMI slipped below 50, and other global jitters (including a surprise from Ford’s head). Together these shocks sent the S&P/ASX 200 down 197.3 points (‑3.8%) and erased more than $50 billion from the Australian market over Thursday and Friday.
Bernanke’s suggestion that the Fed could “take a step down” in the pace of asset purchases if US growth looked sustained spooked investors who had grown used to large bond‑buying programs. The remarks hit bond markets hard and contributed to volatility, prompting currency moves and sharemarket selling as investors priced in the possibility of earlier tapering of quantitative easing.
HSBC’s flash PMI for May fell to 49.6 from 50.4, slipping below the 50 mark that separates expansion from contraction. For everyday investors, a sub‑50 PMI signals softer manufacturing activity in China, which can weigh on commodity demand and hurt large Australian miners and resources stocks.
Big miners named in the article — BHP Billiton, Rio Tinto, Fortescue Metals and Atlas Iron — all slipped during the market downturn. Investors should watch miners because they are sensitive to global growth indicators (like China PMI), commodity prices and bond/currency moves that can change demand and valuations quickly.
Currency markets whipsawed amid the Fed uncertainty. The US dollar fell sharply in one session (about US2¢ to roughly US96¢) and had declined about US7¢ over three weeks, increasing volatility. Such currency moves can affect exporters, commodity prices and the local value of multinational earnings for Australian investors.
Leighton Holdings rose 9¢ to $18.10 after saying it wasn’t concerned about recent mining services woes. Myer fell 18¢ to $2.49 — sales had grown slightly but CEO Bernie Brookes said he remained cautious about Australian retail. Seven West Media dropped 26¢ to $2.10 after US private equity firm KKR said it planned to sell its 12% stake.
Japan’s Nikkei lost over 7% on Thursday amid fears that rising bond yields could derail a fragile recovery, though it recovered a little on Friday. Despite that weekly drop, the Nikkei remained up about 40.5% year‑to‑date, largely due to Bank of Japan efforts to end deflation and stimulate the economy.
The article highlights how quickly global policy comments (like Bernanke’s) and economic data (China’s PMI, bond yields, currency swings) can trigger broad market moves and wipe billions off markets. For everyday investors, it’s a reminder that macro news can create fast volatility across sectors — especially resource stocks and retailers — and to stay informed about major drivers rather than reacting to a single headline.
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