ASX volatility

The S&P/ASX200 Index pulled back 3.844, or 0.1%, to 4,665.30 at 1322 AEST after investors sought stocks that offered yield such as banks and telecommunication companies, and sold mining stocks amid expectations the Chinese economy is spluttering.

The benchmark index had in earlier trade fallen as much as 0.3%, only to rise at midday as much as 0.4%. The index has lost 11% since its 52-week high of 5,220.987 on May 14.

Shares in ANZ Bank rose 19 cents, or 0.7%, to $27.57 at 1322 AEST. Commonwealth Bank added 45 cents, or 0.7%, to $66.19, while National Australia Bank gained 3 cents, or 0.1%, to $28.71. Westpac increased 22 cents, or 0.8%, to $27.77.

“The market is down about 500 points so that’s prompted some to search for yield,” says Matt Sherwood, the strategist at fund manager Perpetual. Australia’s four biggest banks plan to pay as much as 80% of their net profits out in dividends while their franchises aren’t immediately threatened by competition or a bad credit cycle.

Bank shares have also fallen further than the index’s drop in percentage terms in recent weeks, perhaps making them good buys in the eyes of some investors. Westpac shares are down 18% from a 52-week high of $34.06 on May 1. NAB’s stock has dropped 16% since its 52-week high of $34 on April 30. And Commonwealth Bank shares have slid 9.9% since their 52-week high on May 20 of $73.49. Meanwhile, ANZ Bank’s stock has slipped 13% from its 52-week high of $31.84 on April 30.

Telstra shares, which have fallen 12% from its May 22 52-week high of $5.14, had gained 2.5 cents, or 0.6%, to $4.525 at 1322 AEST.

Mining stocks dropped on concerns about financial instability in China and slowing growth in the world’s second-largest economy. China buys the bulk of Australia’s iron ore. The spot price for iron ore imported through the north-east Chinese port of Tianjin fell yesterday from Friday by $US2.91, or 2.5%, to $US112.17 a tonne. BHP fell 48 cents, or 1.5%, to $30.87 at 1322 AEST while Rio Tinto dropped $1.01, or 2%, to $50.53.

Aggregate demand is falling in China while the country’s new leadership, led by President Xi Jinping and Premier Li Keqiang, seems less pro growth, says Morgan Stanley Wealth Management strategist Malcolm Wood. Wood describes the doubling in China’s overnight repurchase rate to 6.47% this year from last as a “self-induced credit crunch in China”.

“If China has a recession, all bets are off,” says Wood. “It’s going to be pretty hard to hide if our major trading partner has a set-back”.

The Reserve Bank of Australia can cut its benchmark cash rate, currently 2.75%, a luxury few other central banks have. But rate cuts may mean very little if China’s economy slumps. Australian company earnings, especially in the mining sector, would suffer a meltdown.