THE Australian sharemarket yesterday suffered its sharpest fall in a month and global markets were last night bracing for further shocks amid fears the euro-zone debt crisis had started to spread, threatening to engulf Italy and Spain.
Sentiment turned deeply bearish among local investors. More than $45 billion has been wiped off the Australian market's value after two days of heavy losses, with banks in the firing line.
The S&P/ASX 200 Index ended yesterday nearly 2 per cent lower, yesterday matching losses across Asian markets. European markets fell sharply on Monday night and on Wall Street the Dow Jones Industrial Average dropped 1.2 per cent, dampened by weak economic data.
"Clearly there's a concern with the European situation at the moment and not so much about about Greece and its inability to fund its own debt issue, but more so what is looming with some of the other European countries Italy in particular," said Justin Gallagher, head of sales trading at investment bank RBS.
At the close, the S&P/ASX 200 was down 86.9 points at 4495.4. The dollar was caught in the selloff and dropped more than US1? to trade last night at $US1.0532.
Banks led the Australian market lower and major resource stocks were also off sharply. Coalminers, however, bucked the trend after a $4.7 billion bid for Macarthur Coal.
National Australia Bank, which has the largest exposure to Europe among the local lenders, had its biggest one-day fall since November, falling 3.7 per cent to $23.88. Losses in ANZ and Westpac were more than 2 per cent while Commonwealth Bank was down 1.8 per cent. Investment bank Macquarie Group tumbled 6 per cent to $28.22, slipping below $30 a share for the first time since March 2009.
While Australia's banks were able to stand on the sidelines when it came to Greece given their minuscule links to the troubled economy, they are sweating a little more as Italy comes under the spotlight, with their exposure to the country running to billions of dollars.
The latest figures compiled by the Bank of International Settlements show Australian banks have a $US3.3 billion ($A3.09 billion) exposure to Italy through bonds and loans. Their exposure to Spain is $US4.2 billion.
After weeks of uncertainty over bailouts for Greece, the Italian benchmark share index crashed 3.8 per cent on Monday as fears mounted it could become the next victim of the sovereign-debt crisis.
Italian government borrowing costs hit 5.7 per cent, their highest in more than a decade, while the yields on Spanish government bonds reached 6 per cent the highest level since the creation of the euro.
Italy is widely regarded as having a weak economic position with its debt-to-GDP ratio of 120 per cent at the end of 2010, the second highest in the euro area after Greece. Its track record on growth is lacklustre, with real GDP growth averaging 1.4 per cent over most of past decade.
German Chancellor Angela Merkel told Italian Prime Minister Silvio Berlusconi to ensure Italy's parliament approved an austerity budget to send "a very important signal" to the markets.
Meanwhile, political leaders and bankers in the Greek debt talks remained unable to agree on how to avert an outright default by Athens.
The 17 governments of the euro zone pointedly failed to rule out a sovereign-debt default by Greece, although the European Central Bank later
released a statement that "confirmed its position that a credit event or selective default should be avoided".
Mr Gallagher said a
string of economic data was due out in the US over the next few days, including Federal Reserve chairman Ben Bernanke's six-monthly monetary policy testimony later tonight, which will give investors critical insight into the health of the economy there.
Frequently Asked Questions about this Article…
What caused the recent sharp fall in the Australian sharemarket?
The fall was driven by renewed fears the euro-zone debt crisis was spreading to bigger economies such as Italy and Spain. Global risk aversion hit Asian, European and US markets, which fed into the Australian sharemarket and left investor sentiment deeply bearish.
How much market value was wiped out and how large was the S&P/ASX 200 fall?
More than $45 billion was wiped off the Australian market after two days of heavy losses. The S&P/ASX 200 ended the day down about 86.9 points at 4,495.4, roughly a 2% fall.
Which sectors and stocks were hardest hit in the sell-off?
Banks led the declines and major resource stocks were also down sharply. Notable moves included National Australia Bank falling 3.7%, ANZ and Westpac down more than 2%, Commonwealth Bank down 1.8% and Macquarie Group tumbling about 6%.
How exposed are Australian banks to Italy and Spain?
According to figures compiled by the Bank for International Settlements cited in the article, Australian banks have about US$3.3 billion (around A$3.09 billion) exposure to Italy through bonds and loans and about US$4.2 billion exposure to Spain.
Did any companies or sectors buck the market trend during the sell-off?
Yes. Coalminers bucked the broader market weakness after a reported $4.7 billion bid for Macarthur Coal, which provided support to that sub-sector despite broader losses.
What was happening in Europe that heightened investor concern?
Italian and Spanish sovereign stress intensified: the Italian benchmark share index crashed about 3.8%, Italian borrowing costs hit roughly 5.7% (their highest in over a decade) and Spanish yields reached about 6% (the highest since the euro’s creation). Political uncertainty in Greece and calls for Italy to approve austerity measures also added to contagion fears.
How did the currency market react to the turmoil?
The Australian dollar was caught up in the sell-off and fell to around US$1.0532 as investors moved away from riskier assets and into safer currencies.
What near-term events should everyday investors watch for market direction?
Investors should watch upcoming US economic data releases and Federal Reserve chair Ben Bernanke’s six-monthly monetary policy testimony, which the article notes could give critical insight into the health of the US economy and influence global markets.
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