European downgrades cut rally short

THE market ended sharply lower yesterday after a mass downgrade of European countries' credit ratings took the wind out of investors' winning streak.

By InvestSMART · 17 Jan 2012

By InvestSMART ·
17 Jan 2012

Comments

THE market ended sharply lower yesterday after a mass downgrade of European countries' credit ratings took the wind out of investors' winning streak.

Stocks fell more than

1 per cent from Friday's close, the market's highest this year, after Standard & Poor's stripped France and Austria of their top-notch AAA status and cut the ratings of seven debt-laden European countries.

Miners and financials took the biggest hits as investors dived for cover in more defensive telecom stocks before a debt sale by newly downgraded France and talks on restructuring Greece's debt this week.

"If we had a Greek default there would be an initial bad reaction, but I think there are probably a lot of people who have factored in an event like that," said Burrell Stockbroking adviser Jamie Elgar.

At the close, the S&P/ASX 200 was down 48.7 points, or 1.16 per cent, at 4147.2.

Miners dropped 1.6 per cent after a fall in metal prices on Friday night as investors lost their appetite for riskier assets.

BHP Billiton shed 62?, or 1.6 per cent, to $36.01, while Rio Tinto dropped 32?, or 0.5 per cent, to $64.89.

Fortescue Metals shed 13?, or 2.7 per cent, to $4.62.

Gold was also caught in the down draught. The spot price, which hit a recent high of $US1662 in European trading on Thursday, finished yesterday's Australian session at $US1638.65 an ounce, down $US6.34 from Friday's close.

Commodities and resources could come under further pressure this week if China's gross domestic product figures, due today, come in below the 8.7 per cent growth that analysts expect.

"China GDP numbers will take centre stage, as the world waits to see how the fastest-growing economy is travelling," said IG Markets market strategist Stan Shamu.

Financial stocks were down 1.2 per cent as dealers worried that the euro-zone debt crisis might put further pressure on banks' lending costs. A series of bond issuances is scheduled in Europe this week, starting with France last night, and Greece and Spain tonight.

Leighton climbed 4.4 per cent to $21.44 after the construction company upgraded its underlying profit forecast for the December half-year to

$270 million, from $250 million.

One of the few stocks to buck the market trend was Dart Energy. It put on 4?, or 9.2 per cent, to 47? after the company announced it had created a wholly owned subsidiary and business unit to develop its growing European shale gas resources.

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

What triggered the market sell-off described in the article?

The sell-off followed a mass downgrade of several European countries' credit ratings by Standard & Poor's — including France and Austria losing AAA status — which dented investor confidence and ended the market's recent winning streak.

How did the S&P/ASX 200 react after the European credit rating downgrades?

The S&P/ASX 200 fell 48.7 points, or 1.16%, finishing at 4,147.2 as investors pulled back after the European downgrades and ahead of scheduled European bond sales.

Which sectors were hardest hit and why should everyday investors care?

Miners and financials took the biggest hits — miners fell as metal prices softened and risk appetite waned, while financials were pressured by worries that the euro‑zone debt crisis could raise banks' lending costs. This matters to investors because sector moves can affect portfolio volatility and short‑term returns.

How did major mining stocks perform during the downturn?

BHP Billiton fell about 1.6% to $36.01, Rio Tinto dropped roughly 0.5% to $64.89, and Fortescue Metals slipped about 2.7% to $4.62, reflecting the broader pullback in resources and weaker metal prices.

What happened to gold and other commodities in this market move?

Gold was caught in the down draft — the spot price, which recently hit US$1,662, finished the Australian session at US$1,638.65 an ounce, down US$6.34 from Friday. The article also notes commodities and resources could face further pressure depending on upcoming China GDP data.

Which upcoming economic data and events should investors watch this week?

Investors should watch China's GDP report due the day of the article — analysts expected 8.7% growth — and a series of European bond issuances (starting with France, then Greece and Spain). Both can affect commodity demand and financial market sentiment.

Were there any stocks that bucked the market trend and why?

Yes. Leighton climbed 4.4% to $21.44 after upgrading its underlying profit forecast for the December half to $270 million (from $250 million). Dart Energy jumped about 9.2% after creating a wholly owned subsidiary to develop its European shale gas resources.

How did commentators describe the potential impact of a Greek default on markets?

Burrell Stockbroking adviser Jamie Elgar said a Greek default would likely cause an initial bad reaction, but he believed many investors had already factored in the possibility — suggesting some of the risk may have been priced into markets already.