Spooked market sheds $50b after mixed signals from Fed

Sharemarkets plummeted this week as investors responded to worrying or confusing news.

More than $50 billion was wiped from the Australian market on Thursday and Friday.

First, there were concerns that the US Federal Reserve might begin slowing its quantitative easing program within a shorter timeframe than expected.

Fed chairman Ben Bernanke confused markets on Thursday, Australian time, when he made contradictory statements about the likelihood of tighter monetary policy in the world's biggest economy.

Late last year, Mr Bernanke had deliberately tied US monetary policy to STATthe country's unemployment rate, saying the Fed would consider tightening policy only when the unemployment rate approached 6.5 per cent.

Since then, the unemployment rate has declined by half a percentage point, to 7.5 per cent, but not enough to think Mr Bernanke would be considering slowing down his bond buying program.

But on Thursday he spooked markets by saying that if the US economy continued to improve, and if that improvement looked likely to be sustained, then "we could, in the next few meetings ... take a step down in our pace of [asset] purchases".

The remark wasn't well received, particularly by investors who have become hooked on the promise of waves of new money.

The news hit bond markets and the Australian dollar plummeted US2¢ in a session to about US96¢ (it has now fallen US7¢ in three weeks).

On the same day, the head of Ford dropped a bombshell, saying all car manufacturing activity in Australia would end by 2016. A major reason for his decision was the high Australian dollar.

For the week, the benchmark S&P/ASX 200 fell 197.3 points, or 3.8 per cent, to 4983.5, while the All Ordinaries Index fell 195.5 points, or 3.8 per cent, to 4964.3.

Aside from Mr Bernanke's comments, there were concerns about softer than expected manufacturing conditions in China, with the HSBC Flash China Manufacturing Purchasing Managers' Index for May falling to 49.6, from 50.4 in April. Anything below 50 means manufacturing activity is contracting.

The big miners took a hit, with BHP Billiton, Rio Tinto, Fortescue Metals and Atlas Iron all slipping backwards.

Then there were fears that Japan's whispered about recovery would be knocked off course by a back-up in its bond yields. The Nikkei lost more than 7 per cent on Thursday, though it recovered slightly on Friday to finish the day up 0.9 per cent.

Japan's sharemarket is still up 40.5 per cent year-to-date, thanks to efforts by the Bank of Japan this year to pull the economy out of its deflationary hole.

For the week, Leighton Holdings rose 9¢, to $18.10, after the construction company said it was not concerned about the recent woes of mining services companies.

Myer fell 18¢, to $2.49. The retailer's sales have grown slightly but chief executive Bernie Brookes said he remains cautious about the future of Australian retailers.

Seven West Media fell 26¢, to $2.10, after US private equity firm KKR said it planned to sell its 12 per cent stake in the company. The decision to sell, which is worth about $265 million, was announced after the close of the stock exchange on Tuesday.

Telstra fell 21¢, to $4.87, and is not saying how many jobs may be lost as part of a major restructure of its internal operations.



ALL ORDS AUSTRALIA

MAY 17 - MAY 24



HIGH 5185.4 LOW 4964.3

4964.3 - 76.5 (1.5%)