Gloom fuels plunge

JITTERY investors endured a volatile day's trading in Australian shares, as an offshore market rout and deepening fears of a global recession helped drive the S&P/ASX200 Index to its lowest close in more than two years.

Investors were left pinning their hopes on promised ''bold action'' from G20 leaders, whose statement pledging to ''preserve the stability of banking systems and financial markets'' helped fuel a short-lived rally in Australia's sharemarket yesterday.

But after a sudden plunge soon after opening, a lunchtime clawback in which it briefly hit positive territory, and an afternoon drop that wiped away almost all the recovered ground, the S&P/ASX200 Index ended the day 61.7 points, or 1.56 per cent lower, at 3903.2.

It has now lost more than 17 per cent of its value so far this year, about 5.6 per cent this week and more than 9 per cent this month alone.

The dramatic day's trade followed a savage sell-off in global markets, which took the Dow Jones Industrial 3.5 per cent lower on Thursday night, while markets in Europe posted drops of more than 4.5 per cent. The S&P 500 has now fallen 17 per cent from a three-year high on April 29, while Germany's DAX index is down more than 25 per cent this year and the UK's FTSE1000 is almost 15 per cent lower.

Thursday's 2.6 per cent drop on the S&P/ASX200 Index pushed it below the 4000-point threshhold to its lowest point since July 2009.

As IMF and World Bank leaders assembled in Washington for meetings over the weekend, world markets continued to be haunted by doubts over the economic fate of Greece, the health of France's banks and the potency of efforts by the US Federal Reserve to re-invigorate the world's biggest economy.

''The fundamental here is European economy is looking weaker by the day ? and at the same time the US economy is not looking too flash either,'' said Shane Oliver, from AMP Capital Investors. ''It is an ongoing reaction to the risk of the recession in Europe and the US.''

The IMF warned the global economy was entering a "dangerous new phase", although both World Bank president Robert Zoellick and the IMF head Christine Lagarde maintained that a new recession was not inevitable.

The sell-off in Australia yesterday came despite the Reserve Bank expressing confidence in Australia's banking system, and a move from rating agency Standard & Poor's to confirm Australia's triple-A credit rating, highlighting the economy's ''overall resilience''.

Richard Morrow, director at E.L. & C. Baillieu Stockbroking, said the Australian market had opened with a ''pall of gloom''. Market watchers said trading activity by short-sellers - who borrow then sell stocks in the hope of buying them back and returning them at a lower price - accounted for much of the volatility.

''There was probably some short covering, followed by some sellers taking advantage of the intra-day rally,'' said Simon Bonouvrie at Platypus Asset Management.

Shares in big miners BHP Billiton and Rio Tinto were among the worst hit, each dropping more than 3 per cent to $34.55 and $62.65 respectively, after commodity prices tanked overnight.

The dive in commodity prices continued to drag the Aussie dollar below parity with the greenback. The dollar had dropped as low as US96.92? in US trade on Thursday night, and was last night trading just above US98?.

The softer dollar helped boost Australian stocks exposed to offshore markets, with exporters CSL and Amcor among the few major stocks that closed in the black. CSL gained 45? to $28.45 and Amcor was 12? up to $6.89.

In its Financial Stability Review, released yesterday, the Reserve said the latest turmoil appeared less serious than the meltdown after the collapse of Lehman Brothers in 2008 - though it did not rule out another crisis.

Any ''contagion effects'' would be more limited because sovereign debt was better understood than the complex securities in 2008.

With

CLANCY YEATES, SIMON MANN