Good news from China halts roller-coaster ride

EXTREME volatility rocked the Australian sharemarket, but positive Chinese economic data reversed a horror start triggered by panic selling across the globe.

By InvestSMART · 10 Aug 2011

By InvestSMART ·
10 Aug 2011

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EXTREME volatility rocked the Australian sharemarket, but positive Chinese economic data reversed a horror start triggered by panic selling across the globe.

The domestic market was down more than 5 per cent in early trade after Wall Street plunged roughly the same amount on Monday, the first trading session in the US since Standard and Poor's downgraded its credit rating.

A wave of panic selling hit European markets, led by Greece's main bourse, which plummeted 6 per cent.

But relief came midway through yesterday's session when China's consumer price index data showed non-food inflation was lower than last month, implying that inflation may have peaked. The S&P/ASX200 index finished up 48.7 points, or 1.22 per cent, at 4034.8 points while the broader All Ordinaries index put on 40 points, or 0.99 per cent, to 4096.7.

Analysts declared Australia a bear market yesterday after the S&P/ASX 200 fell below 4000 points for the first time in two years, describing the sell-off as a crisis in investor confidence.

While the morning's early losses were partly attributed to margin calls, IG Markets's strategist, Ben Potter, described the turnaround as "a classic short covering relief rally". Traders were aggressively looking to take profits on their short positions, Mr Potter said.

In early trade, falls outnumbered rises more than 13 to one, but by close of market, 841 stocks were down, 458 were up and 302 were steady.

The futures market is pointing to a positive start to today's trade.

Gold stocks shone after the price of the precious metal hit a new record high of well over $1700 per ounce. The spot price of gold closed in Sydney at $US1747.30 per ounce, up $37.12 from Monday's local close.

The Philippines-focused goldminer OceanaGold Corp was the best performing stock in the S&P/ASX200 index, finishing up 19?, or 9.95 per cent, at $2.10.

Sharemarket heavyweight BHP Billiton was up 45?, or 1.23 per cent, at $37.05 while Rio Tinto advanced $1.11, or 1.62 per cent, to $69.74.

National Australia Bank said it was on track to deliver an annual profit higher than $5.5 billion after a strong June quarter earnings result emphasised the return of margin growth for the bank. NAB finished up 60?, or 2.87 per cent, at $21.50.

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Frequently Asked Questions about this Article…

What triggered the extreme volatility in the Australian sharemarket?

The volatility was sparked by a global wave of panic selling after Wall Street plunged following Standard & Poor’s credit-rating downgrade. Early Australian losses were amplified by margin calls, but the market recovered later in the session.

How did positive Chinese economic data affect the ASX and investor sentiment?

Midway through trade, China’s consumer price index showed lower non-food inflation than the previous month, suggesting inflation may have peaked. That news helped reverse the early sell-off, sending the S&P/ASX 200 up 48.7 points (1.22%) to 4,034.8 and stabilising investor sentiment.

Why did analysts call Australia a 'bear market' and what does that mean for everyday investors?

Analysts described Australia as a bear market after the S&P/ASX 200 fell below 4,000 points for the first time in two years, signalling a significant market decline and a crisis in investor confidence. For everyday investors, it’s a reminder to review risk tolerance and investment horizons rather than react impulsively to short-term drops.

What is a 'short-covering relief rally' and did it play a role in the market turnaround?

A short-covering relief rally occurs when traders who had bet against the market buy back shares to lock in profits or stop losses, which can push prices up quickly. IG Markets strategist Ben Potter described the midday recovery as a classic short-covering relief rally, contributing to the market rebound.

How did gold and gold stocks perform during the session?

Gold hit a new record, trading well over US$1,700 per ounce and closing in Sydney at US$1,747.30 (up about US$37.12). Gold stocks outperformed, with Philippines-focused OceanaGold rising about 9.95% to A$2.10 and other precious-metal names benefiting from the higher gold price.

Which heavyweight resources stocks moved the market and by how much?

Major miners performed well: BHP Billiton rose to A$37.05 (about a 1.23% gain) and Rio Tinto advanced to A$69.74 (roughly a 1.62% gain), helping support the broader market recovery.

What did National Australia Bank report and how did its shares react?

National Australia Bank said it was on track to deliver an annual profit higher than A$5.5 billion after a strong June-quarter result that highlighted a return of margin growth. NAB’s shares finished higher, up about 2.87% to A$21.50.

What was overall market breadth and what are futures suggesting for the next session?

Although early trade saw falls outnumber rises by more than 13 to one, the market closed with 458 stocks up, 841 down and 302 steady. Futures pointed to a positive start for the following day’s trading session.