Rally shortlived as confidence evaporates

THE local stockmarket closed 1.4 per cent lower yesterday as warnings from two credit ratings agencies wiped out optimism that Europe's debt crisis may be nearing a resolution.

By InvestSMART · 14 Dec 2011

By InvestSMART ·
14 Dec 2011

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THE local stockmarket closed 1.4 per cent lower yesterday as warnings from two credit ratings agencies wiped out optimism that Europe's debt crisis may be nearing a resolution.

Moody's said it would review the credit ratings of all European nations after last week's Brussels summit failed to deliver "decisive policy measures".

Fitch Ratings forecast that Europe was unlikely to avoid a "significant economic downturn", despite the measures agreed to last week.

"The onslaught on risk assets really reflects how unimpressed investors were by the results from the European summit," an IG Markets strategist, Stan Shamu, said.

The benchmark S&P/ASX200 index closed 59.4 points, or 1.4 per cent, lower at 4193.4, while the broader All Ordinaries was down 59.7 points, or 1.4 per cent, at 4251.7.

Two interest rate cuts in as many months by the Reserve Bank has not been enough to save Australia's economy from the contagion spreading from Europe, a survey found.

National Australia Bank's monthly business survey showed domestic business confidence was unchanged, but investors remained concerned about the effect of Europe's deteriorating economy.

"[Monday's] optimism was like one single ray of sunshine squeezing through an otherwise cloudy sky," a CommSec analyst, Steven Daghlian, said. "Without that rate cut we could have seen confidence pulling back."

Dealers are now looking towards a slew of US and Chinese data this week - particularly US monthly retail figures due out last night - to determine further market direction.

Locally, resource stocks came under further pressure after the federal government downgraded its forecasts for export earnings for minerals and energy exports to $206 billion in 2011-12 from $215 billion previously.

BHP Billiton was down 71? at $35.82 while Rio Tinto was down $1.37 at $62.76.

Energy stocks also were under pressure, ending down 2.1 per cent. Woodside fell 84? at $31.53 and Santos fell 21? to $13.01.

The banks all lost some ground, with NAB down 61? at $23.75, Westpac 46? at $20.83, the Commonwealth 48? at $49.35 and ANZ 21? at $20.74.

Market turnover was 1.67 billion shares worth $4.15 billion.

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Frequently Asked Questions about this Article…

Why did the Australian sharemarket fall 1.4% and what caused the sudden drop?

The local sharemarket slid 1.4% after credit rating warnings from Moody's and Fitch knocked investor confidence. Moody's said it would review European sovereign ratings after a Brussels summit failed to deliver decisive measures, while Fitch warned Europe was unlikely to avoid a significant economic downturn. That concern about Europe’s debt crisis triggered selling across risk assets.

How did the ASX 200 and All Ordinaries close after the sell-off?

The benchmark S&P/ASX 200 closed down 59.4 points (1.4%) at 4,193.4, and the broader All Ordinaries fell 59.7 points (1.4%) to 4,251.7, according to the article.

Which sectors and stocks were hit hardest during the market fall?

Resource and energy stocks were hardest hit after the federal government downgraded export forecasts. BHP Billiton fell to about $35.82 (down 71 cents), Rio Tinto to $62.76 (down $1.37), Woodside to $31.53 (fell 84 cents) and Santos to $13.01 (fell 21 cents). Energy stocks overall ended down about 2.1%.

Did the banks also feel the impact and which major banks fell?

Yes, major banks lost ground. Reported moves included NAB at $23.75 (down 61 cents), Westpac at $20.83 (down 46 cents), Commonwealth Bank at $49.35 (down 48 cents) and ANZ at $20.74 (down 21 cents).

How did the federal downgrade of mineral and energy export earnings affect investor sentiment?

The government cut its forecast for minerals and energy export earnings for 2011–12 from $215 billion to $206 billion, which put additional pressure on resource stocks and reinforced concerns about the outlook for Australia’s export-led sectors.

Were recent Reserve Bank rate cuts enough to support market confidence?

No. The article notes two recent RBA interest-rate cuts weren’t enough to offset market concerns about European contagion. A NAB monthly business survey showed domestic business confidence was unchanged and investors remained worried about Europe’s deteriorating economy.

What data and events were traders watching next to gauge market direction?

Dealers were looking to a slew of US and Chinese economic data to determine further direction—particularly US monthly retail figures—since those releases could influence risk sentiment and global markets.

How much trading activity was there on the day the market fell?

Market turnover that day was 1.67 billion shares worth about $4.15 billion, indicating relatively heavy trading as investors reacted to the news.