Europe puts smile on day of darkness

YESTERDAY should have been a happy one for most people with money invested in the Australian stockmarket.

Small and large shareholders alike have been waiting for some concrete movement towards a resolution in the long-running European sovereign debt crisis.

Finally, by late morning (our time), European clouds started to lift as news trickled through that the banks holding Greek bonds had come to an agreement on taking a 50 per cent haircut.

Its not over but the deal does represent at least some kind of early breakthrough.

For investors, it should have been a buying opportunity or at the very least a massive sigh of relief. Instead, it was an exercise in frustration.

We are are all too used to seeing the headline that the market has crashed. Investors lose money its the risk we sign up for as investors or superannuants.

But when the market maker the exchange that facilitates the trading of shares stops operating, the blame is squarely placed on the shoulders of the ASX.

Yesterdays four-hour closure of trading on the ASX was nothing short of a shemozzle.

And make no mistake, some large investors particularly proprietary trading institutions and hedge funds will have lost money as a result of the inability to trade.

By way of example, some investors holding short positions essentially a bet on stocks going down would have been caught by the inability to cover those positions during the four hours when they knew share prices would rise.

The ASX will have a lot of unhappy clients and plenty of questions to answer about how its system crashed.

Whether there are calls for compensation remains to be seen. The ASXs managing director and chief executive, Elmer Funke Kupper, said: Today, ASX did not meet the high standards that we set for ourselves and that our customers expect.

One consolation was that the futures markets were operating so institutions could trade the share price index futures as a proxy.

But there was also lots of action among individual stocks plenty of news and plenty of reasons to buy and sell.

The day began with the full-year result from National Australia Bank. It was slightly better than analysts expected costs were contained and the charge for bad and doubtful debts continued to fall. The result also confirmed the bank had been successfully taking market share from some of its major rivals, an outcome that had value implications for some other bank stocks.

Next off the block was Woolworths, whose quarterly sales were patchy and less impressive than its major competitor, Coles. But there could be no flurry of market activity on the immediate release of this information.

As the market reopened in the afternoon, Woolworths became one of the few large stocks to register a decline.

Ten Network released a well-telegraphed disaster profits down 90 per cent. But investors bid the stock up in the belief that the turnaround story had merit.

Meanwhile, the ASX trading crash, which was said to be the result of the testing of a new product, ASXPlus, was one of those pivotal occurrences that could not have happened at a worse time.

The ASX is set to get its first taste of competition when Chi-X starts operating on Monday.

Many large brokers have already indicated they will place some of their business with the start-up operator, owned by Japans Nomura.

But for all major users the ASX crash cemented the need for more than one operator in the market.

The new exchange will now become the back-up and a potentially meaningful competitor.

In much the same way, Virgin Australia has been lucky to have launched its upgraded business market product at the same time Qantas is feeling the ill-effects of disruptions to its flying schedule.

Business travellers all over Australia have been giving the Virgin service a try and some will remain using the smaller airline, at least as a secondary supplier, even after the Qantas industrial action has been sorted out.

For the ASX, the system breakdown will not have a meaningful impact on its revenues or profits. Much of the volume lost by the halt was recovered when the market began trading yesterday afternoon.

But it served as a reminder that there have been several instances over the past couple of years where trading platforms have crashed and a back-up exchange comes in handy.

Luckily for the ASX, the crash was overshadowed by the upbeat response to the news from Europe, which pushed the index up almost 2.5 per cent.

Not surprisingly, shares in local banks and resource companies felt the immediate effects of the euro package as did the Australian dollar.

While the news was a much-needed stake in the ground towards resolution of the European debt crisis, economists warned that it was not a cure-all for the problems.

European banks will take a 50 per cent loss on their Greek bond and themselves then require a bailout in the order of ?110 billion ($A147 billion) to get their capital ratios at the more secure 9 per cent level.

But who pays for this?

The first stop will be the various European governments many of which are not flush with funds. The deal also entails member governments beefing up the European Financial Stability Facility as a last resort to support bank funding.

Under this scenario, the debt does not disappear but is dispersed or passed around in a kind of pass-the-parcel game.

As AMP economist Shane Oliver points out, it is doubtful it will mean the end of the European crisis. He says the vicious cycle of fiscal austerity, weaker growth, budget blowouts, ratings downgrades and more fiscal austerity is likely to remain.