Cut in interest rate trims sails on bourse

THE sharemarket fell sharply yesterday, breaking a six-day winning streak, as investors took an interest rate cut from the central bank as a signal the euro zone debt crisis will hurt the local economy.

By InvestSMART · 7 Dec 2011

By InvestSMART ·
7 Dec 2011

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At the close, the benchmark S&P/ASX 200 Index was down 64.1 points, or 1.5 per cent, at 4257.2.

The Reserve Bank cut the cash rate by 25 basis points to 4.25 per cent, its second successive rate cut in as many months. Dealers said the move was a sign that the contagion from Europe was having a growing effect on Australia's economic health.

"While the European situation is getting a lot of the attention, its impact on China could affect our economy in a big way," Cameron Security client adviser Adrian Leppinus said.

Analysts said separate official data showing falling government spending and strong import growth was likely to trim expectations for September-quarter growth, due in the national accounts today.

"The RBA's obviously seeing signs that things in Europe are coming to our shores," Mr Leppinus said.

The RBA's rate cut came after ratings agency Standard & Poor's said France and Germany, along with 13 other euro zone countries, were at risk of a credit downgrade if they failed to agree on measures to tackle the debt crisis this week.

The news dampened initial market optimism after German Chancellor Angela Merkel and French President Nicolas Sarkozy said they were pushing for a rewrite of the European Union's governing rules to tighten economic co-operation.

Industrial, resources and mining stocks all felt the pinch as sentiment soured.

BHP Billiton fell 55?, or 1.5 per cent, to $36.71, while Rio Tinto lost $1.45, or 2.2 per cent, to $65.55.

Newcrest Mining ended down 4 per cent, or $1.40, at $33.99 after Deutsche Bank downgraded the stock after a landslide halted mining at its Cadia goldmine in New South Wales.

The price of gold in Sydney closed at $US1714.17 an ounce, down $US30.71 from Monday.

Waning investor appetite weighed on energy stocks as oil prices slipped to nearly $US100 a barrel in Asia. Woodside Petroleum fell 71? to $33.48, Santos was down 18? at $13.36 and Oil Search was 7? weaker at $6.48.

Santos reported that its Devil Creek gas processing plant in Western Australia had produced first gas, boosting WA's gas supply by up to 20 per cent.

Among banking stocks, ANZ was down 6? to $20.99, Commonwealth Bank was off 26? at $49.70, Westpac was 23? weaker at $21.46 and National Australia Bank was down 37? at $24.28.

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Frequently Asked Questions about this Article…

How did the RBA interest rate cut affect the ASX sharemarket?

The Reserve Bank cut the cash rate by 25 basis points to 4.25%, and the ASX fell sharply that day, breaking a six-day winning streak. The benchmark S&P/ASX 200 was down about 64.1 points to 4,257.2 as investors treated the cut as a sign that European debt problems could be hitting the Australian economy.

Why did the euro zone debt crisis weigh on Australian stocks?

Dealers and analysts said the RBA cut signalled that contagion from Europe could be affecting Australia. Concerns included possible credit downgrades in Europe and weaker global demand, which dented sentiment and hit export-heavy sectors and resources stocks.

Which mining and resources stocks were hardest hit on the market drop?

Industrial, resources and mining stocks felt the pinch. The article notes BHP Billiton fell to $36.71, Rio Tinto slipped to $65.55, and Newcrest Mining ended at $33.99 after a downgrade tied to an operational halt at its Cadia goldmine.

What happened with Newcrest Mining and why did its shares fall?

Newcrest Mining fell after Deutsche Bank downgraded the stock following a landslide that halted mining at its Cadia goldmine in New South Wales. The share price closed lower at $33.99.

How did gold and oil prices move, and what did that mean for related stocks?

Gold in Sydney closed at US$1,714.17 an ounce, down about US$30.71 from the prior session. Oil prices slipped to nearly US$100 a barrel in Asia, which weakened investor appetite for energy stocks and contributed to falls in companies such as Woodside Petroleum, Santos and Oil Search.

What notable operational news did Santos report during the market downturn?

Santos reported that its Devil Creek gas processing plant in Western Australia had produced first gas, which could boost WA's gas supply by up to 20%—a positive operational development mentioned alongside the wider market weakness.

How did major Australian bank stocks perform during the sell-off?

Banking stocks were lower that day. The article reports ANZ, Commonwealth Bank, Westpac and National Australia Bank all fell, with the piece listing closing prices of roughly $20.99 for ANZ, $49.70 for Commonwealth Bank, $21.46 for Westpac and $24.28 for NAB.

What near-term economic data and events did analysts say investors should watch?

Analysts pointed to official data showing falling government spending and strong import growth that could trim expectations for September-quarter growth in the national accounts. Investors were also watching European negotiations and credit-rating risks that influenced market sentiment.