Shares tumble as US debt deadline looms

THE sharemarket closed sharply lower yesterday on concerns that the US government may default if an agreement cannot be reached on raising its debt ceiling.

By InvestSMART · 26 Jul 2011

By InvestSMART ·
26 Jul 2011

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THE sharemarket closed sharply lower yesterday on concerns that the US government may default if an agreement cannot be reached on raising its debt ceiling.

The S&P/ASX 200 index was down 72.5 points, or 1.58 per cent, at 4530.4, while the All Ordinaries fell 70.3 points, or 1.5 per cent, at 4603.8.

The September share price index futures contract was 82 points weaker at 4505.

Regional markets also lost ground, with the Nikkei in Japan falling 0.85 per cent and the Hang Seng in Hong Kong down 0.86 per cent.

All three global ratings agencies have threatened to cut the US's AAA credit rating if an agreement is not reached.

Talks between the President, Barack Obama, and Congress at the weekend failed to produce an agreement, as the August 2 deadline looms.

An Ord Minnett investment adviser, Francesco De Stradis, said despite the local market's strong fundamentals, it sold off because of the US debt fears.

"If they [US lawmakers] don't decide by [the deadline], you can expect the markets to get a bit more punishing," he said.

A market correction of 10 per cent could be on the cards, although "level heads might prevail", he said.

"I would say to investors that having some gold exposure is a good thing."

Newcrest Mining was the best performer and one of a handful of stocks to gain yesterday as the gold price climbed. The shares rose 36? to $40.38.

The spot price of gold in Sydney was $US1614.30 an ounce, up $US25.56 from the close on Friday.

Among the banks, National Australia Bank fell 59?, or 2.34 per cent, to $24.63. The Commonwealth fell 98? to $49.54, ANZ fell 42? to $21.31, and Westpac fell 34? to $21.26.

Although they were all lower, the big banks recovered from intraday lows after the Reserve Bank said they had little direct exposure to the sovereign debt of the riskiest European countries and were resilient to any disruption in credit markets.

The market heavyweight BHP Billiton fell 37? to $43.06 and its rival Rio Tinto fell 44? to $82.06.

Retailers sank after Premier Investments downgraded its earnings outlook and announced the closure of up to 50 stores. Its shares fell 19?, or 3.58 per cent, to $5.12.

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Frequently Asked Questions about this Article…

Why did the Australian sharemarket tumble today?

The market fell mainly because investors are worried the US government could default if lawmakers don’t reach an agreement to raise the debt ceiling before the August 2 deadline. That uncertainty pushed the S&P/ASX 200 down 72.5 points (about 1.58%) to 4530.4 and the All Ordinaries down 70.3 points (about 1.5%) to 4603.8.

How could the US debt ceiling deadline affect my investments?

Rating agencies have warned they could cut the US’s AAA credit rating if there’s no deal, which increases market volatility. An Ord Minnett adviser in the article said markets could get more punishing and even suggested a market correction of around 10% is possible if no agreement is reached. That means higher short-term risk for equities and more price swings for everyday investors.

Which Australian stocks and sectors were hit hardest in the sell-off?

Big banks and major resources stocks fell. National Australia Bank dropped to $24.63, Commonwealth Bank to $49.54, ANZ to $21.31 and Westpac to $21.26. Heavyweights BHP Billiton and Rio Tinto also fell to $43.06 and $82.06 respectively. Retailers sank after Premier Investments downgraded its earnings outlook and said it may close up to 50 stores.

Did any stocks benefit from the market moves?

Yes — Newcrest Mining was one of the few gainers as the gold price rose. Newcrest’s shares climbed to $40.38, benefiting from a higher spot gold price.

What happened to the gold price and why does it matter to investors?

The spot price of gold in Sydney was US$1,614.30 an ounce, up US$25.56 from the previous close. The Ord Minnett adviser in the article suggested that having some gold exposure can be a good defensive move during debt-ceiling uncertainty and wider market volatility.

What did the Reserve Bank say about Australian banks' exposure to international debt risk?

The Reserve Bank said the big Australian banks have little direct exposure to the sovereign debt of the riskiest European countries and are resilient to potential credit-market disruption. That comment helped the banks recover from intraday lows during the sell-off.

How did global markets react to the US debt concerns?

Regional markets also lost ground: Japan’s Nikkei fell about 0.85% and Hong Kong’s Hang Seng was down about 0.86%. Australian September share price index futures were weaker by 82 points at 4505, reflecting broader risk-off sentiment.

What should everyday investors watch next as the US debt deadline approaches?

Keep an eye on progress in US debt-ceiling negotiations, any statements from credit rating agencies, and corporate updates (for example, earnings downgrades like Premier Investments’). Also monitor safe-haven indicators such as the gold price and commentary from central banks about financial-system resilience, since these can signal changing risk levels for portfolios.