THE stockmarket ended a horror week in which worries about Europe's finances and a slowing Chinese economy saw investors abandon equities, taking the monthly loss to about $110 billion.
The benchmark ASX200 index lost 2.7 per cent on the day and 5.6 per cent for the week, notching the worst five-day return since September last year. The ASX200 shed 110.9 points for the day, the most this year, to end at 4046.5. The All Ordinaries fared much the same, losing 109.7 points, or 2.6 per cent, to close at 4098.8 points.
The dollar touched new lows for the year, sinking to US97.95? at one point. Interest rate futures markets are now assessing the chance of another 50 basis-point rate cut by the Reserve Bank when it meets on June 6 as a 75 per cent chance.
Investors are also pricing in another 125 basis points in cuts for the cash rate in 12 months' time. If it eventuates, the cash rate would drop to just 2.5 per cent, half a percentage below its lowest point during the global financial crisis.
IG Markets analyst Stan Shamu said investors were pricing in the worst case scenario in Europe and it was difficult to predict what would happen in coming weeks and months.
"People are now scared that we will get a lot of contagion from Greece and Spain and the situation will end very badly," he said.
The week began with the news that Greek political parties had failed to form a government and that the country will hold fresh elections on June 17. The prospect of weeks of doubt about whether a new government will emerge, and whether it will back the European Union-imposed austerity package, will likely dog financial markets.
In the meantime, investors have begun searching for the next European debt domino to fall, with Spain the most likely candidate.
Confidence that Australia's reliance on Asia to shield it from another European crisis is evaporating, now that signs of a slowing China get stronger by the day.
Major broking houses, including Goldman Sachs, are cutting their growth targets for China for this year. China's house prices fell in a record number of cities last month and car dealers posted inventory levels that foreshadowed deeper price cuts - just the latest in a string of bad news.
Australian Stock Report head of research Geoff Saffer said worries about China's economic slowdown will continue to have an impact on the market.
"We expect the Chinese story to continue as an overhang to the Australian market for some time," he said. "Until China implements wide-ranging stimulus measures we expect fears about a slowdown to continue. The short-term outlook is probably still bearish."
Miners have borne the brunt of the falls. BHP Billiton lost $1.31, or 4 per cent, to $31.46, and Rio Tinto lost $2.96, or 5.1 per cent, to $55.20 on the day.
Among the major banks, NAB lost $1.03 to $23.32, Westpac lost 81? to $20.41, ANZ lost 73? to $20.84, and Commonwealth Bank lost $1.62 to $49.40.
The spot price of gold was $US1572.40 an ounce, up $US24.27. The gold price rise provided one of the few bright spots on the day, with goldminer Newcrest up 3.8 per cent to $25.03.
Woolworths lost 1 per cent to $26.68 to be among the better performers of the top 50 stocks on the day, while Wesfarmers lost 2.1 per cent to $29.55. Telstra lost 1.7 per cent to $3.52.
Preliminary turnover was 2.03 billion shares worth $5.99 billion.
Frequently Asked Questions about this Article…
What caused the ASX200 to drop sharply and wipe out about $110 billion in market value?
The ASX200 fell as investors fled equities amid worries about Europe's debt problems (notably Greece and the risk of contagion to Spain) and signs of a slowing Chinese economy. The index lost 2.7% for the day and 5.6% for the week, taking the monthly loss to about $110 billion and closing the day at 4046.5.
How did concerns about Europe and Greece specifically affect Australian markets?
Markets reacted to news that Greek parties failed to form a government and that fresh elections would be held on June 17, increasing uncertainty over whether Greece will accept EU-imposed austerity. Analysts said investors feared contagion to other European countries, especially Spain, and were pricing in a worst-case scenario for Europe, which weighed on Australian stocks.
How are expectations for Reserve Bank interest rate cuts reflected in the market?
Interest rate futures priced a 75% chance of another 50 basis-point RBA rate cut at the June 6 meeting, and investors were also pricing in a total of 125 basis points of cuts over the next 12 months. If that eventuates, the cash rate would drop to about 2.5% according to the market pricing cited in the article.
Which sectors and major Australian stocks were hit hardest during the sell-off?
Miners bore the brunt of the falls: BHP Billiton dropped $1.31 (4%) to $31.46 and Rio Tinto fell $2.96 (5.1%) to $55.20. Major banks also weakened: NAB closed at $23.32 (down $1.03), Westpac at $20.41, ANZ at $20.84, and Commonwealth Bank fell $1.62 to $49.40.
Did any stocks or sectors perform well despite the market rout?
Yes — precious metals were a bright spot. The spot price of gold rose to US$1,572.40 an ounce (up US$24.27), and gold miner Newcrest climbed 3.8% to $25.03. Retailers like Woolworths were among the better performers in the top 50, though Woolworths still slipped 1% to $26.68.
How is China’s economic slowdown affecting Australian investors and market sentiment?
Signs of a slowing China—such as record numbers of cities with falling house prices, weaker car dealer sales and rising inventories—have prompted major brokers to cut growth targets for China. Australian analysts expect the Chinese slowdown to remain an overhang on the Australian market until wide-ranging stimulus measures are implemented.
What did market turnover look like on the day of the sell-off and what does that indicate?
Preliminary turnover was 2.03 billion shares worth $5.99 billion. That level of trading indicates heavy activity on a day of broad selling, reflecting strong investor participation in the sell-off.
How did everyday investors react to the combined pressures from Europe and China in simple terms?
Everyday investors moved away from equities amid growing fear of European contagion (following Greece’s political deadlock and the risk to Spain) and mounting evidence of a China slowdown. The result was broad market falls, weaker banks and miners, a stronger gold price, and higher expectations of RBA rate cuts.
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