Market posts fourth monthly loss in row

The alarming prospect of a US loan default drove further losses on the sharemarket yesterday, completing its worst month since May last year.

By InvestSMART · 30 Jul 2011

By InvestSMART ·
30 Jul 2011

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The alarming prospect of a US loan default drove further losses on the sharemarket yesterday, completing its worst month since May last year.

THE alarming prospect of a US loan default drove further losses on the sharemarket yesterday, completing its worst month since May last year.

The market has suffered four consecutive monthly losses, its poorest run since February 2009. The S&P/ASX 200 Index finished down 39.2 points at 4424.6, about 100 points below where it stood on the same day last year. The index shed 4 per cent in July.

AMP chief economist Shane Oliver said uncertainty about sovereign debt negotiations in the US had caused ''huge volatility'' for global equity markets. The world economy would suffer ''widespread damage'' if US leaders failed to reach a deal to borrow more money. ''If America doesn't agree to increase the debt ceiling in a reasonable time ? then government spending will have to be slashed,'' Dr Oliver said. ''Public servants in America won't get paid, people on welfare won't get welfare cheques. People who've had operations won't get payments from Medicare.''

Republican and Democrat leaders have until Tuesday to strike a deal to raise the US debt ceiling.

Dr Oliver said mining stocks would be among the hardest hit by a default. ''Materials are at the forefront of global demand so the worry is if the US doesn't come to an agreement, there'll be big cuts in spending and uncertainty about the US economic recovery,'' he said. The materials sector led the falls, dropping 1.4 per cent, and the financial sector shed 1 per cent. Macquarie Bank analyst Brian Redican said data released yesterday showing a fall in lending was another bad sign for the banks.

The prospect of an interest rate rise when the Reserve Bank meets on Tuesday is adding to pressure on finance stocks.

Mr Redican said a rate increase would be disastrous for retailers.

The consumer discretionary index dropped 0.3 per cent. BHP Billiton was the worst performer, shedding 61? to $41.42. Rio Tinto dropped $1.20 to $80. The big four banks all fell, Westpac lost 23? to $20.42, ANZ 16? to $20.83, NAB 18? to $24 and CBA 17? to $49.27.

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Frequently Asked Questions about this Article…

Why did the ASX market fall and record four consecutive monthly losses?

The ASX slid after the alarming prospect of a US government loan default drove global volatility. The S&P/ASX 200 finished down 39.2 points at 4,424.6 and the index shed about 4% in July, marking four straight monthly losses — its weakest run since February 2009.

What is the US debt ceiling risk and how can it affect Australian sharemarkets?

Uncertainty around US debt ceiling negotiations can trigger 'huge volatility' in global equity markets. Economists warned that if US leaders don’t raise the debt limit, government spending could be slashed and there could be serious knock‑on effects for global demand, which would hurt export‑sensitive markets like Australia’s.

Which sectors on the ASX were hardest hit in the sell‑off?

The materials sector led the falls, dropping about 1.4%, while the financial sector shed about 1%. Consumer discretionary also eased (around 0.3%). Analysts specifically flagged mining and materials stocks as particularly vulnerable if US demand or confidence weakens.

How did major miners and miners' stocks perform during the sell‑off?

Big miners were weaker in the session: BHP Billiton was the worst performer, finishing at about $41.42, and Rio Tinto fell around $1.20 to $80. Mining stocks were singled out by economists as among the most exposed to a slowdown in global demand.

What happened to the big four banks and why are financials under pressure?

All four major banks fell during the session — Westpac, ANZ, NAB and CBA were down in price terms — as falling lending data and the possibility of a Reserve Bank interest‑rate rise added pressure on finance stocks. Analysts noted the drop in lending is a negative sign for bank earnings.

Could a Reserve Bank interest rate rise make things worse for retailers and banks?

Yes — the prospect of a rate rise when the RBA meets was cited as an extra headwind for finance stocks, and analysts warned that a rate increase would be damaging for retailers by reducing consumer spending and adding pressure to margins.

What near‑term events should investors watch that could move the market?

Watch the US debt ceiling negotiations (a key deadline was noted), the Reserve Bank’s upcoming policy decision, and domestic lending or economic data. These items were highlighted in the article as likely to drive further volatility, especially for materials and financial sectors.

Should everyday investors panic and sell during this market volatility?

The article describes significant uncertainty and 'huge volatility' tied to sovereign debt talks and rate prospects, but it doesn’t give specific financial advice. A pragmatic approach based on the coverage is to monitor debt‑ceiling outcomes, RBA moves and sector exposure (especially materials and banks) before making major portfolio changes.