Stocks hammered on US debt stalemate

AUSTRALIAN stocks came in for broad-based selling yesterday in line with Asian markets on fears that the US government would fail to reach agreement on raising the country's debt ceiling by the August 2 deadline.

By InvestSMART · 26 Jul 2011

By InvestSMART ·
26 Jul 2011

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Talks between US president Barack Obama

and Congress on Sunday failed to produce an agreement on spending

cuts, tax increases and how the $US14.29 trillion debt ceiling could be raised to avoid a sovereign default.

All three global ratings agencies have threatened to cut the nation's triple-A credit rating unless an agreement is reached.

In Asia, Japan's Nikkei fell 0.85 per cent and Hong Kong's Hang Seng lost

0.86 per cent.

Australia's benchmark S&P/ASX 200 Index slid

72.5 points, or 1.58 per cent, to 4530.4 only a point above the low of the day. The fall erased the gains made on Thursday and Friday.

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

"If they 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 might be on the cards, he said although "level heads might prevail prior to that".

"I would say to investors that having some gold exposure is a good thing," Mr De Stradis said.

The gold price soared. Newcrest Mining was the best performer in the top 50, gaining 33?, or 0.9 per cent, at $40.38. Spot gold reached $US1624.07 an ounce before the start of share trading, and closed at $US1617.56, up $US28.82.

The big four banks

were hit hard. National Australia Bank dropped 59? (2.3 per cent) to $24.63, Commonwealth lost 98?

(1.9 per cent) to $49.54,

ANZ fell 42? (1.9 per cent) to $21.31 and Westpac declined 34? (1.6 per cent) to $21.26.

However, the banks finished above their lows of the session after the Reserve Bank said they had little direct exposure to the sovereign debt of the riskiest European countries and were more resilient to any disruption in credit markets.

Market heavyweight BHP Billiton eased 37?, or 0.9 per cent, to $43.06 and Rio Tinto dropped 44? or 0.5 per cent to $82.06.

Retailers sank after Premier Investments downgraded its earnings outlook and announced the closure of as many as

50 stores. Premier slumped 19?, or 3.6 per cent, to $5.12.

The dollar slipped a fifth of a US cent to $US1.0813 as investors awaited any progress from the US on an agreement to raise the debt ceiling.

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Frequently Asked Questions about this Article…

How did the US debt ceiling stalemate affect Australian stocks and the ASX 200?

The US debt ceiling impasse triggered broad-based selling in Australia. The S&P/ASX 200 slid 72.5 points (1.58%) to 4,530.4, erasing gains from the prior two trading days as investors worried a failure to raise the US debt ceiling by the August 2 deadline could risk a sovereign default and credit-rating downgrades.

Which sectors and companies were hit hardest by the US debt fears on the ASX?

Banks and retailers were among the hardest hit. The big four banks fell notably (National Australia Bank, Commonwealth Bank, ANZ and Westpac all dropped around 1.6–2.3%), retailers sank after Premier Investments downgraded its earnings and announced store closures, while resources and gold stocks saw mixed moves.

What happened to Australia’s major banks during the sell-off and why did they recover off intraday lows?

The big four banks fell sharply — National Australia Bank down about 2.3% to $24.63, Commonwealth Bank about 1.9% to $49.54, ANZ about 1.9% to $21.31 and Westpac about 1.6% to $21.26. They finished above session lows after the Reserve Bank said the banks had little direct exposure to the sovereign debt of the riskiest European countries and looked more resilient to credit-market disruption.

How did gold and gold stocks perform, and should everyday investors consider gold exposure?

Spot gold climbed intraday to US$1,624.07 and closed at US$1,617.56, up US$28.82. Newcrest Mining was the top performer in the top 50, rising about 0.9% to $40.38. Ord Minnett adviser Francesco De Stradis suggested that having some gold exposure can be a good thing amid the uncertainty.

Why did Premier Investments shares fall and how much did they drop?

Premier Investments downgraded its earnings outlook and announced it would close as many as 50 stores, prompting a large sell-off. The stock slumped about 3.6% to $5.12 on the news.

What did analysts say about the risk of a broader market correction?

Analyst Francesco De Stradis said that if lawmakers don’t resolve the US debt-ceiling issue by the deadline, markets could become more punishing and a market correction of around 10% might be possible, although he noted ‘level heads’ might prevail before that occurs.

How did resource giants BHP Billiton and Rio Tinto react to the market sell-off?

Resource heavyweights eased: BHP Billiton fell about 0.9% to $43.06 and Rio Tinto dropped about 0.5% to $82.06, reflecting the broader risk-off sentiment that hit global and Australian markets.

What happened to the Australian dollar during the debt-ceiling uncertainty and why does that matter to investors?

The Australian dollar slipped about one-fifth of a US cent to US$1.0813 as investors awaited any progress on the US debt-ceiling negotiations. Currency moves like this can affect returns for Australian investors in overseas assets and influence commodity-linked stocks at home.