ASX bows to Ben's final straw

Poor Ben Bernanke. The Federal Reserve chairman’s name is on every traders and salesman’s lips today. He is being blamed for the drop in the S&P/ASX200 Index that is gathering pace this afternoon. At 1331 AEST the index had fallen 118.881, or 2.5%, to 4742.50, after  an intraday low of 4738.40 just minutes previously.

Bernanke says the Fed may “moderate” the rate of bond purchases later this year from $US85 billion a month. His comments are pushing US interest rates higher. That’s bad for stocks. The US 10-year bond yield rose to its highest level in 15 months. Investors may have taken fright anticipating higher US rates may squash a nascent recovery in the world’s biggest economy.

Moreover, say traders, the outlook for the world’s second-biggest economy China is gloomy. Economic growth this year is likely to be less than 8%, down from previous years. Interest rates are also rising in Australia’s biggest trading partner. The Chinese leadership is attempting, through higher rates, to stomp on property speculation which is making housing unaffordable for many citizens who are voicing their dissatisfaction through social media, worrying the Communist Party which seeks to maintain social stability above all else. Foreign investors have voiced concerns over the stability of China’s financial system following reported payment difficulties by some Chinese banks.

The Australian dollar’s slide is somewhat of a manifestation of concerns about the local economy. At 1331 AEST it was trading at US 92.67 cents compared with US 92.95 cents yesterday and US 95.43 cents on Monday, according to Bloomberg data.

Foreign investors had over the last two years bought Australian stocks on the basis of the Australian currency’s strength against the US dollar as well as the yield offered by shares such as the four biggest banks and Telstra. The weakness in the Australian dollar and the crimping in the yield of such stocks from as much as 8% to 5% may have prompted some investors to take profits following the market’s earlier gains this year. The S&P/ASX200 Index rose 28% between July 1 and its 52-week high of 5220.987 on May 14. Since May 14 the index has fallen 9.3%, according to Bloomberg data.

Bank stocks led the market decline today. The big four banks account for almost a third of the S&P/ASX200 Index’s market value. ANZ shares were down 76 cents, or 2.7%, to $27.59. Commonwealth Bank shares slid $2.06, or 3%, to $66.30. National Australia Bank stock dropped 92 cents, or 3.1%, to $29.12. Westpac slipped $1.075, or 3.7%, to $28.155.

The financials sub-index fell 2.7%. The basic materials sub-index, the mining stock index, was down 3.5%.

BHP shares fell $1.01, or 3.1%, to $31.98. Rio Tinto dropped $2.21, 4.1%, to $52.17.

Still, some stocks that garner a large percentage of their earnings in the US rose. News Corp shares surged $2.44, or 17%, to $16.99. Shares in pharmaceutical company CSL added 19 cents, or 0.3%, to $57.53.