ECB's big bazooka no match for China fears

THE Australian sharemarket failed to respond to the European Central Bank's "big bazooka" plan to save the eurozone from break-up amid fresh concerns over China's economy and falls in the price of iron ore.

By InvestSMART · 8 Sep 2012

By InvestSMART ·
8 Sep 2012

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Whereas European and US markets leapt as much as 3 per cent after the ECB announced a new program to buy the bonds of troubled eurozone countries, Australia's sharemarket barely rose as post-boom fears dominated.

The dollar jumped by nearly US1?, hitting companies that earn a large portion of their profits in foreign currency.

"Ultimately the ECB plan must be good news for Australia as well, but for now people seem more fixated on the idea of a post-commodity boom economy, and what that's going to look like in the future," the head of research at National Australia Bank, Peter Jolly, said.

"It tells you that it hasn't simply been European issues depressing growth prospects, it's a unique thing to do with Australia and commodity prices and the Asian slowdown."

The ECB announced a new bond purchase program for debt-ridden European countries in a bid to fix Europe's banking crisis and prevent a break-up of the monetary union.

The Treasurer, Wayne Swan, said it was a "positive step towards putting Europe back on a sustainable footing".

The definitive steps saw Frankfurt (up 2.9 per cent), Paris (up 3.1 per cent), and London (up 2.1 per cent) jump higher, while in the US the S&P500 (up 2 per cent) and the Dow Jones (up 1.9 per cent) rose strongly.

Local investors were less enthused, failing to exploit rallies in Asian bourses where Shanghai (up 4.2 per cent), Hong Kong (up 2.4 per cent), and Japan (up 2 per cent) rose sharply.

But in a sign that local investors still welcomed the news from Europe, analysts said there was a small increase in risk appetite for both equity and bond markets.

"Clearly resource stocks have been belted in recent weeks and months, and you're seeing a bit of money coming back into them, as well as defensive and yield stocks," the managing director at UBS, George Kanaan, said.

"In this era when commodity prices are lower than they were, the Australian dollar needs to be lower. But the fact that it's not, and the fact that it rallied today, cuts a little bit into growth prospects," Mr Jolly said.

The performance of stocks was mixed, with local resource and energy sectors rising, while health stocks fell heavily and financial stocks lost ground.

"In the last few weeks, with iron ore prices slipping so much, that still is the dominant global story for Australian stocks," a DB analyst, Tim Baker, said.

"I guess you would expect the banks to do a little bit better when there's less financial system risk but yeah, it's a bit of a puzzle."

Bargain hunters targeted resource stocks yesterday, fearing they had been oversold and that commodities would remain at historically high levels despite recent heavy falls.

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Frequently Asked Questions about this Article…

What was the European Central Bank’s “big bazooka” and why did global markets react?

The article describes the ECB’s “big bazooka” as a new bond‑purchase program to buy the bonds of debt‑ridden eurozone countries to stabilise the banking crisis and prevent a break‑up of the monetary union. European and US markets jumped (for example, Frankfurt +2.9%, Paris +3.1%, London +2.1%, S&P 500 +2%, Dow +1.9%) while many Asian bourses also rose, reflecting relief that the ECB took decisive action.

Why didn’t the Australian sharemarket rally as strongly as other global markets after the ECB announced stimulus?

Local investors were more focused on domestic and regional issues—concerns about a post‑commodity‑boom Australia, falling iron ore prices and a slowdown in Asia (notably China). The article quotes NAB research head Peter Jolly saying Australians are fixated on what a post‑commodity‑boom economy will look like, which limited the market’s response to the ECB news.

How did movements in the Australian dollar affect Australian companies after the ECB announcement?

The article notes the Australian dollar jumped following the ECB announcement, and that move hurt companies that earn a large portion of profits in foreign currency. A stronger AUD can cut into growth prospects for exporters and resource companies in an era when commodity prices are lower than before.

Which Australian sectors gained or lost ground on the day covered by the article?

Resource and energy sectors rose as bargain hunters targeted oversold resource stocks. By contrast, health stocks fell heavily and financial stocks lost ground, despite commentary that banks might be expected to do a bit better when financial system risk eases.

Is now a good time to buy beaten‑up resource stocks after recent falls in iron ore and other commodities?

The article reports that bargain hunters moved into resource stocks fearing they had been oversold and believing commodities might stay historically high despite recent falls. That suggests some investors saw buying opportunities, but the piece also highlights ongoing concerns about iron ore declines and the Asian slowdown—factors investors should weigh before deciding.

How important is iron ore price movement for Australian stocks according to the article?

Iron ore falls are described as the dominant global story for Australian stocks in recent weeks. DB analyst Tim Baker is quoted saying the slip in iron ore prices remains the key factor affecting local equities, so iron ore trends are very influential for resource‑heavy markets like Australia’s.

What did market strategists quoted in the article say about the outlook for the Australian dollar and growth?

Analysts in the article (including NAB’s Peter Jolly and UBS’s George Kanaan) suggested that in an era of lower commodity prices the Australian dollar should be lower. The fact it rallied cuts into growth prospects, and lower commodity prices imply a tougher environment for Australian growth unless currency and commodity dynamics shift.

What practical considerations should everyday investors take from the ECB stimulus and the Asian slowdown?

The article’s takeaways for everyday investors are to watch currency moves (a stronger AUD can hurt exporters), monitor commodity prices (especially iron ore) because they dominate local stock performance, and be mindful of sector rotation—resources and yield/defensive stocks may attract money while healthcare and some financials can lag. Analysts also signalled a small lift in risk appetite after the ECB move, so investors should balance opportunities with the risks from the Asian slowdown.