THE DISTILLERY: Selling spree

Markets slumped, despite the European Central Bank overnight buying billions of dollars of bonds in market operations designed to shore up Italy and Spain. It helped for a short while, but from Asia to Europe to Wall Street, a selling wave overwhelmed markets, stunning investors and ending the odd tentative rally caused by the ECB's buying. Apart from gold and US bonds and other high quality debt, it was a selling spree that echoed the days after Lehman Brothers collapsed in mid-September 2008. 
 
The Financial Times summed up a frenetic night of trading offshore in a report in its Asian and other editions: "Traders are flooding into gold and 'haven' bonds while shedding stocks and industrial commodities as global markets gyrate following the downgrading of the US credit rating. Intervention in the eurozone bond market by the European Central Bank helped take some of the sting out of the broader sell-off as European markets opened. But that boost to sentiment proved shortlived – with the euro sliding sharply – while concerns over the longer-term implications of the US downgrade, and resurgent fears about the health of the global economy sees Monday's dealing screens spit silent claret."
 
And gold prices surged to new highs, as the FT also reported: "Investors and strategists were already targeting a gold price above $1,800 mere hours after the precious metal surged past $1,700 a troy ounce for the first time. Gold touched a new nominal record of $1,716.19 a troy ounce on Monday in the wake of the downgrade of the US government's credit rating by Standard & Poor's over the weekend. But strategists were already looking to the next milestone. JPMorgan encapsulated the bullish sentiment in the gold market, predicting that bullion could hit $2,500 by the end of the year."
 
The key now is the US and its central bank and Fairfax's Malcolm Maiden wrote: "The US government has agreed to cut spending, and the US Fed's key interest rate is already close to zero. The Fed meets tonight, our time. But its willingness to launch Plan C – another round of quantitative easing – is going to be be tempered by the fact that even as the US economy struggles to grow, it is showing signs of reigniting inflation."
 
The Financial Review reported on its website this morning: "Shares on Wall Street plunged as investors fled to the safety of gold and bonds the first trading day after Standard & Poor's downgraded the United States " And the paper's Chanticleer columnist reported: "Welcome to the second wave of the global financial crisis when equity investors bear the pain for lack of political leadership on fiscal management."
 
Adele Ferguson wrote in the Fairfax broadsheets this morning: "Investors in global equities markets might be feeling battered and bruised as fears of a global recession take hold but the riots in London could become a symbol of a social backlash smouldering away in the debt-bloated countries of Europe and the US. With so much negativity, it is hard to see what will snap everyone out of the malaise. Here, the market breached the psychological 4000 barrier yesterday, wiping off billions of dollars, and it looks as if it doesn't know how to stop. Over the past 21 trading days, the market has fallen by a whopping 14.6 per cent. Since April it has fallen by 20 per cent."
 
And the slump is hurting many, including the fattest of local fat cats, as the AFR reported: "The rich have not been spared from the market meltdown. Ten of Australia's richest individuals have lost more than $2.6 billion in the past five trading days."
 
And don't forget the banks which have already been hammered. With the NAB updating trading today, The Australian's John Durie noted this morning: "All of which puts NAB boss Cameron Clyne in a tough position this morning, when he presents the bank's latest quarterly update. The People's Bank faces more issues than most of the big four, which explains why it fell some 4 per cent – nearly double that of its Sydney bank peers, with CBA down 1.3 per cent and Westpac down 2.3 per cent. NAB's Clyne will do his very best today to put a positive spin on the stockmarket collapse, for the simple reason that he, like the rest of the banking community, has a vested interest in keeping the place solvent."
 
In the same vein, Fairfax's Ian Verrender wrote: "Negative gearing only works when capital values are rising. Right now they are not. That has the potential to produce forced sales of investment properties and a rise in bad debts among the banks. As we saw last time around, a relatively small rise in bad debts eats heavily into shareholder equity. That's why our banks are under fire right now, why the short sellers have them by the curlies. That's why nervous investors will be hanging off every word from Cameron Clyne today and Ralph Norris tomorrow." The Commonwealth Bank's 2011 result is out tomorrow.
 
News Ltd's Terry McCrann pointed out this morning: "But it is China that still holds the key to our future. Certainly, the future of our economy, indeed ultimately our financial sector and investments as well. The US and Europe can deliver Global Financial Crisis Mk II. Which could be worse than GFC I. Or not as bad. I'll explain in a moment. But if China kept booming, while we wouldn't exactly sail through, the damage wouldn't be that severe. This of course raises a fundamental question. Could China continue to boom through GFC II? The answer depends on the severity of any GFC II."
 
But in The Australian, economics editor Michael Stutchbury was thinking differently: "The sharemarket meltdown means Wayne Swan's promise to deliver his first budget surplus next year is under serious threat. Yet cutting into the budget to meet his surplus promise also could further weaken the economy. The dilemma is that Swan is finding it even harder to maintain the budget fig leaf that conceals our China risks." That's an 'I told you so' column.
 
Another typical column came from The Australian's Jennifer Hewitt. Under the headline "Labor's lame assurances are not fooling anyone", Ms Hewitt swerved and veered: "The Gillard government is urging everyone to remember how sound Australia's economic fundamentals are. Treasurer Wayne Swan boasts there is no G20 finance minister in the world who wouldn't swap places with him. But the Australian market will be carried along by whatever happens on global markets, uncertain about whether Standard & Poor's decision to downgrade US government debt will intensify another downward spiral. Neither the pessimists nor the optimists can really know that yet." And certainly not columnists!
 
Fairfax's Adele Ferguson wrote yesterday on the broadsheets' websites: "The Australian sharemarket's valiant attempt to fight off global negativity is failing, with the ASX200 index falling below the psychologically important 4000 barrier in afternoon trading, as investors look ahead to another slide when Wall Street opens tonight. The market bungeed – sinking to its lowest level since July 17, 2009 – in a fluctuating shifts that saw the main indexes claw back losses only to resume their falls. China's dives of between 4 and 5 per cent aren't helping sentiment, nor is the fact Dow futures are pointing to falls of about 2.3 per cent."
 
Business Spectator's Stephen Bartholomeusz wondered: "Will the $US2 trillion 'mistake' in Standard & Poor's rationale for its downgrading of US government debt muffle the underlying message that the US has a massive structural fiscal challenge that because of the partisan behaviour of its politicians isn't being adequately addressed? Will the European Central Bank's decision to broaden the coverage of its bond-buying program to cover Italy and Spain's sovereign debts and attempt to prevent those far larger economies from following Greece into a eurozone-destructive crisis have the desired effect?" 
 
And Fairfax's Malcolm Maiden peered into the night, also on the papers' websites: "The debt markets will however be watching closely tonight to see what the ripple effect of the American sovereign debt downgrade is, and one key debt market is US municipal, or local government, bonds. Many of them need to be downgraded now to bring them into line with the lowered rating on federal government debt, and muni debt is very widely held by investment institutions. Downgrades of munis could begin tonight our time: institutions will be checking their investment mandates to see if they can continue to hold the muni debt. If they can't they will need to offload them, adding to the selling pressure in the markets."
 
And still at Fairfax, Michael Pascoe tried a bit of ball gazing: "Given the excess global savings looking for AAA-rated parking lots and the sheer size of American debt that's losing that status, it's not inconceivable that Australia, like Brazil and Switzerland, will face a problem of too much foreign money wanting to be invested here. That would be interesting. The Swiss have cut rates to try to discourage the inflow. The Brazilians tax capital inflows for the same reason. Neither tactic seems to be working. And Brazil isn't triple A rated. The Reserve Bank's balancing act, already difficult, just became harder."

But life goes on for the markets. The local reporting season is well under way. The Australian's John Durie wrote yesterday: "The reality is, of course, for slower growth across the board, as evidenced by today's results from JB Hi-Fi, and Bendigo and Adelaide Bank. Both reported slower numbers, albeit with question marks over JB Hi-Fi, with offshore suppliers demanding faster payments, which meant inventory levels rose faster than payables, resulting in a fall in working capital of some $62 million." 
 
The Australian's Tim Boreham wrote yesterday: "On early evidence, Bendigo's full-year cash profit of $336.2 million (15.5 per cent higher) passed the sternest of markets tests: the shares were up 4 cents around midday compared with the overall market which slumped up to 2 per cent (but was valiantly recovering). In particular, the bank is enjoying the consumer flight to safety, with strong deposit growth of 12 per cent over the year. At the same time, the bank managed to grow its net interest margin from 2.12 per cent to 2.17 per cent, reflecting a "less aggressive pricing structure than many of our competitors.''
 
And there are deals to be done, despite the turmoil, as the AFR reported: "Shopping centre giant Centro is expected to release the long-awaited blueprint for its new $3 billion amalgamated fund as early as Tuesday." Meanwhile, The Australian's Nabila Ahmed noted: "It's ironic the markets are again in the grip of turmoil as Centro Properties Group prepares to unveil today the fruits of its "Project Vision" to amalgamate all its funds into one listed entity. It's essentially a solution to the problem triggered by the last big market meltdown, the GFC. The Moelis-advised Centro Properties Group agreed with a majority of its senior debtholders in March to pursue the debt-for-equity restructure that will involve converting the property giant's $3.65 billion senior debt into equity."