Investors defy European gloom with a local rally

BUOYED by a boost to industrial stocks, the Australian sharemarket rebuffed the turmoil suffered by its global counterparts in the wake of the euro zone debt crisis to close more than 1 per cent higher yesterday.

By InvestSMART · 12 Nov 2011

By InvestSMART ·
12 Nov 2011

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The S&P/ASX 200 rose 52.4 points to 4296.5 points on turnover of $5.7 billion, the highest daily figure since October 28. Investors dashed into the market midway through the day in a rally that was prompted by moves to cover short positions.

It capped an extraordinary week in Europe, in which Italy and Greece lost prime ministers and Italian bond yields revealed bond holders were seriously concerned about its ability to repay debt.

The head of international equities at Wingate Group, Chad Padowitz, said markets would re-focus on corporate news when sovereign issues calmed down.

"It is Europe when something in Europe happens ... but when you get a few weeks where things are in the background [attention] rushes on to corporate earnings and what is happening in the US at a company specific level," he said.

So far there had been good news from large retailers and banks, which have experienced a decrease in bad debts, Mr Padowitz said.

"I think [earnings] have come out roughly in line with expectations. Most companies have done a reasonable job of managing costs and expectations, but chief executives are cautious," he said.

But a Wilson Asset Management equities analyst, Martin Hicks, said that in the current market it was hard to find Australian companies with strong earnings growth. "It is all about the European headlines. There is extreme volatility and uncertainty," he said.

However, there was some good news on the horizon because the Reserve Bank's recent cut to the official cash rate was likely to lead to more rate cuts, he said.

Fairfax dips

SHARES in Fairfax Media, publisher of the Herald, dropped 6.5? to 86? as the market responded to the news that major shareholder and the media family scion, John B. Fairfax, had sold his stake in the company. After the decision to offload his 9.7 per cent holding which was placed with institutions at 85? a share 82.8 million shares changed hands on Friday, making the stock the biggest mover by volume.

John B. Fairfax: On the outside now looking in Page 10

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Frequently Asked Questions about this Article…

Why did the Australian sharemarket rally even though Europe was in turmoil?

The article says the local market was buoyed by a boost to industrial stocks and a mid‑day rush to cover short positions. The S&P/ASX 200 rose 52.4 points to 4,296.5 on turnover of $5.7 billion, with investors focusing on domestic corporate news despite euro zone debt worries.

What is short covering and how did it drive the market rally?

Short covering happens when traders buy back shares they had borrowed and sold, which can push prices up quickly. The piece reports that moves to cover short positions prompted a wave of buying midway through the day, helping lift the S&P/ASX 200.

How did the euro zone debt crisis affect Australian investor sentiment?

The article notes the euro zone crisis—including political changes in Italy and Greece and rising Italian bond yields—created extreme volatility and uncertainty. Analysts said sovereign headlines can dominate markets, but when those issues subside attention often shifts back to company earnings and domestic news.

Which sectors helped the rally and what was happening with company earnings?

Industrials led the lift, and there was also positive news from large retailers and banks, which have seen decreases in bad debts. Analysts quoted in the article said earnings have generally come in roughly in line with expectations, with many companies managing costs well, though CEOs remain cautious.

What did analysts say about growth prospects and volatility in the current market?

A Wilson Asset Management analyst in the article said it was hard to find Australian companies with strong earnings growth amid extreme volatility. Another commentator from Wingate Group said markets will re‑focus on corporate news once sovereign worries calm down.

Did trading activity change during the rally and why does turnover matter?

Yes. The article reports $5.7 billion in turnover—the highest daily figure since October 28—which indicates strong participation and can amplify price moves. High turnover also reflected large block trades, including a major sale of Fairfax shares.

What happened with Fairfax Media and major shareholder John B. Fairfax?

Fairfax Media shares dropped about 6.5% after news that major shareholder John B. Fairfax sold his stake. The sale involved a 9.7% holding that was placed with institutions, and about 82.8 million Fairfax shares changed hands, making it the biggest mover by volume that day.

What practical takeaways should everyday investors get from this market day?

The article suggests everyday investors should expect volatility from overseas sovereign headlines, watch company earnings and sector trends (like industrials, retailers and banks), and note that policy moves—such as the Reserve Bank's recent cash rate cut and the prospect of further cuts—can influence markets. Staying cautious and focused on fundamentals was the message from the analysts quoted.