AN EARLY sharemarket plunge of more than 3 per cent reinforced nervousness about global economic conditions yesterday, although major indicators showed world financial systems weathering Greek shockwaves.
By the market's close yesterday, the ASX 200 had recovered to a fall of 0.3 per cent despite falling precipitously at the opening.
UBS Australasia's chief economist, Scott Haslem, said if debt fears from Greece were not contained in Europe, the world faced the prospect of "Global Financial Crisis No. 2".
But he pointed to market indicators of financial distress that remain well below peak levels that occurred when the investment bank Lehman Brothers collapsed in September 2008.
It was the second worst week of falls for the ASX 200 since market turmoil in November 2008, or a fall of 6.6 per cent for the week.
The ASX 200 closed at 4305.4, or more than 14 per cent below its peak above 5000 on April 15, and its lowest level since August.
The Australian currency also remained flat yesterday, trading about US82.87?, despite hitting a low of US80.73? during the day, well below its April 30 high of US93.04?.
In a reminder of previous market ructions, rumours were reported that the Reserve Bank stepped in to buy the Australian currency as it did in late 2008. Weekend Business believes this was not the case.
The prolonged currency sell-down was attributed by AMP Capital's chief economist, Shane Oliver, to investors seeking safe havens in global uncertainty and the likelihood that the Reserve Banks would postpone further Australian interest rate rises.
Mr Haslem said the most likely outcome of the instability was that European policymakers would address contagion fears posed by Greece and there would be a return to market normality, with little impact on Australia's growth prospects.
Despite sharemarket turmoil and big fluctuations in the Australian currency, interbank lending rates in the United States, Europe and Australia remain below peaks reached at the height of the global financial markets.
The interbank lending rate is less than 0.7 percentage points above a benchmark rate in all three markets.
At the height of the crisis, the rate at which US banks were prepared to lend to each other blew out to more than 3.6 percentage points above a benchmark rate, the drying-up of credit presaging a near collapse in the global banking system.
In another measure of financial stability, the prices of credit default swaps used as an indicator of possible default on government bonds have reached historically high levels for Greece and Spain.
However, the prices for credit default swaps for bonds from Australia, the US and Britain remain below earlier financial crisis peaks.
An index that measures the volatility in financial markets, known as the VIX, spiked to 45 on Thursday, less than the 80 it reached during the Lehman Brothers collapse, but more than double recent lows.
Sharemarket analysts have also played down the impact of the new resources super profit tax as a contributor to widespread market falls.
In a note yesterday Gerard Minack, an analyst with Morgan Stanley, said commodity prices and mining stocks had fallen globally in the past month based on such factors as concerns about European growth and the sustainability of China's growth.
Dollar could hit US75? Page 3
Frequently Asked Questions about this Article…
Why did the Australian sharemarket (ASX 200) plunge and then recover?
The article says markets fell sharply early—more than 3%—because investors were nervous about global economic conditions, especially debt concerns from Greece. By the close the ASX 200 had recovered to a smaller fall (about 0.3%). Analysts pointed to contagion fears driving the initial sell-off and later buying that reduced losses by the day’s end.
How big was the recent weekly fall in the ASX 200 and what does that mean for investors?
The ASX 200 fell about 6.6% for the week, making it the second worst week since the market turmoil of November 2008. For everyday investors this shows elevated short-term volatility and highlights the importance of focusing on longer-term goals rather than reacting to single-week swings.
Are economists warning of a repeat global financial crisis because of Greek debt fears?
Some economists, like UBS Australasia’s chief economist Scott Haslem, warned that if Greek debt fears weren’t contained in Europe there was a risk of a ‘Global Financial Crisis No. 2’. However, he also noted market distress indicators remain well below the peaks seen during the Lehman Brothers collapse in 2008 and expects policymakers to address contagion fears.
What happened to the Australian dollar during the market turmoil and was the Reserve Bank involved?
The Australian dollar fell, trading around US$0.8287 after dipping to about US$0.8073, down from an April high near US$0.9304. There were rumours the Reserve Bank bought the currency (as it did in 2008), but Weekend Business reported that was not the case. AMP Capital’s chief economist Shane Oliver attributed the sell-down to investors seeking safe havens and expectations the RBA might postpone further rate rises.
How did interbank lending rates behave during the recent turmoil and why does that matter?
Interbank lending rates in the US, Europe and Australia stayed below peaks reached during the global financial crisis; the article notes they were less than 0.7 percentage points above benchmark rates in all three markets. That matters because relatively low interbank spreads suggest the banking system wasn’t experiencing the severe credit freeze seen in 2008.
What do credit default swaps (CDS) say about government-bond risk for Greece, Spain and Australia?
The article reports CDS prices reached historically high levels for Greece and Spain, indicating elevated perceived default risk for those countries. By contrast, CDS prices for bonds from Australia, the US and Britain remained below earlier financial-crisis peaks, implying lower market-implied default risk for those governments.
What does the spike in the VIX volatility index mean for investors?
The VIX spiked to 45 (up from recent lows), signaling a sharp rise in market volatility and investor anxiety. While this is well below the VIX’s 80 level during the Lehman collapse in 2008, a jump to 45 indicates increased short-term uncertainty and the potential for larger price swings across equity markets.
Did the new resources super profits tax cause the sharemarket falls and what happened to mining stocks?
Sharemarket analysts downplayed the new resources super profits tax as a major cause of the widespread market falls. Morgan Stanley analyst Gerard Minack noted that commodity prices and mining stocks had fallen globally over the past month, driven more by concerns about European growth and the sustainability of China’s growth rather than solely by the tax change.
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