Market claws back losses after bank deposit fright

After a lunchtime fright rocked bank stocks, the sharemarket managed to keep its steady pulse, closing just in the black.

The benchmark S&P/ASX 200 Index welcomed August, finishing up 1.2 points at 5053.3. The flat finish came after manufacturing data from China came in as expected and US Federal Reserve chairman Ben Bernanke said it would be business as usual with its stimulus efforts.

Modest gains began early in trade, with the ASX buoyed by the Australian dollar sinking to US89.10¢ - a three-year low - amid growing speculation that the Reserve Bank would cut interest rates next week.

But the initial gains were soon eroded. Bank stocks tumbled about 2 per cent, pulling the broader market, which was generally trading in positive territory, into the red after an incorrect report in The Australian Financial Review was picked up by local media outlets and global wire service Reuters.

The AFR reported that the federal government was planning to tax bank deposits between 0.5 and 1 per cent to fund a bank bailout package, if ever needed. Instead, those figures should have been 0.01 and 0.05 per cent - a big difference.

After the correction the banks clawed back some of their losses, but still finished well in the red. Commonwealth Bank closed $1.09, or 1.5 per cent, weaker at $73.12. NAB shed 50¢, or 1.6 per cent, to $30.73, ANZ fell 37¢, or 1.2 per cent, to $29.39, while Westpac dipped 2¢, or 0.06 per cent, to $30.87.

Bank of America Merrill Lynch chief economist Saul Eslake was baffled by the government's proposal, saying no depositor in an Australian bank had lost a cent since the 1890s.

"'It's a dopey idea for a dopey scheme," Mr Eslake said.

He said shares in the banks had initially taken a hit because investors had assumed the deposit levy's cost would be funded by bank profits.

"The market reaction is probably an overreaction, but an understandable initial one."

The big miners finished higher, despite HSBC figures showing China's manufacturing production shrank in July, with its PMI index down to 47.7 points, as expected, from last month's 48.2.

BHP Billiton advanced 53¢, or 1.5 per cent, to $35.17, while Rio Tinto was up 43¢ at $57.94.

The supermarket chain owners were also higher, with Woolworths firming 19¢ to $33.51 and Wesfarmers up 18¢ at $40.74.