Market weaker on surprise rate decision

STOCKS closed weaker yesterday after the central bank unexpectedly kept interest rates on hold and both National Australia Bank and Macquarie Group posted results that disappointed the market.

By InvestSMART · 8 Feb 2012

By InvestSMART ·
8 Feb 2012

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STOCKS closed weaker yesterday after the central bank unexpectedly kept interest rates on hold and both National Australia Bank and Macquarie Group posted results that disappointed the market.

The S&P/ASX 200 Index finished down 21.8 points, or 0.51 per cent, at 4274.2.

CommSec chief equities economist Craig James said it was no surprise that the sharemarket slumped following the Reserve Bank's decision to keep the cash rate at 4.25 per cent.

Mr James said the RBA was waiting on the outcome of Greek debt talks before changing the official rate.

Almost all economists and the market were expecting a rate cut of 25 basis points to 4 per cent, following reductions of the same amount in November and December.

"Lower interest rates would have served to boost the competitiveness of shares and property compared with cash-based investments and bonds," Mr James said.

"At this stage, we are factoring in a move in May, after the next [Australian] inflation figures," he said.

CMC Markets sales trader Ben Taylor said financial stocks took a hit following the RBA's decision because it meant a lack of stimulation to lending demand.

NAB said yesterday that higher funding costs were affecting its business. Its shares fell 96?, or 4 per cent, to $23.21.

Among the other big banks, ANZ put on 3? to $21.36, Westpac declined 11? to $20.92 and Commonwealth eased 33? to $50.51.

Investment bank Macquarie Group warned of a 25 per cent drop in net profit for this financial year amid difficult market conditions. Its stock gave up 20? to $25.90.

Among consumer discretionary stocks, Myer was down 4? at $2.07 and David Jones dipped 5? to $2.51.

Market leader BHP Billiton, which will release its half-year results today, was down 31? at $37.90 and Rio Tinto retreated $1.29, or 1.8 per cent, to $71.01.

Cochlear was up $4.41, or 7.6 per cent, at $62.52 after the bionic ear developer reported a lower than expected net loss of $20 million.

Newcrest, which is slated to deliver its first-half results on Friday, slipped 38? to $33.54 in response to a further fall in gold.

At the close of Australian trading, the spot gold price was at $US1722.715 an ounce, down $US12.05 from Monday's close of $US1734.77.

Market turnover was 1.82 billion shares worth $4.62 billion, with 460 shares up, 528 down and 382 steady.

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Frequently Asked Questions about this Article…

Why did the ASX 200 fall after the RBA unexpectedly kept interest rates on hold?

The S&P/ASX 200 slipped after the Reserve Bank kept the cash rate at 4.25% when the market had largely expected a 25 basis point cut. The surprise decision removed the immediate boost investors expected from lower rates, and the index finished down 21.8 points (0.51%) at 4,274.2.

How does the RBA holding rates at 4.25% affect everyday investors and asset competitiveness?

According to CommSec’s chief economist Craig James, lower interest rates would have made shares and property more competitive versus cash and bonds. With the RBA on hold, that relative stimulus is absent for now, which can weigh on share prices and reduce lending demand that supports financial-sector earnings.

What happened to major bank shares after the RBA decision and why did NAB’s stock fall?

Bank stocks moved unevenly after the decision. NAB said higher funding costs were affecting its business and its shares fell to about $23.21. Other big bank prices that day included ANZ at $21.36, Westpac at $20.92 and Commonwealth Bank at $50.51. The RBA hold reduced near-term stimulation to lending demand, which hit financial stocks.

How did Macquarie Group's profit warning affect its share price?

Macquarie Group warned of a 25% drop in net profit for the financial year due to difficult market conditions, and its stock fell sharply to about $25.90 as investors reacted to the earnings downgrade.

What was the market reaction for resource and mining stocks like BHP, Rio Tinto and Newcrest?

Resource stocks were mixed: BHP Billiton was trading lower at about $37.90, Rio Tinto retreated $1.29 (about 1.8%) to $71.01, and Newcrest slipped to about $33.54 — in Newcrest’s case the fall was linked to a further decline in the gold price.

How did the fall in the gold price influence gold miners and the spot market?

The spot gold price at the close of Australian trading was US$1,722.715 an ounce, down about US$12.05 from the previous close. That slide put pressure on gold-focused stocks such as Newcrest, which recorded a share decline in response to the weaker gold price.

Were there notable moves among consumer discretionary stocks like Myer and David Jones?

Yes. Consumer discretionary names were weaker that day: Myer fell to about $2.07 and David Jones dipped to about $2.51, reflecting softer investor sentiment in the sector after the RBA decision and broader market weakness.

What was overall market breadth and turnover on the trading day?

Market turnover was 1.82 billion shares worth about $4.62 billion. Of the stocks traded, 460 rose, 528 fell and 382 were unchanged, indicating a broadly weaker session across the market.