US standoff takes another slice off stocks

THE sharemarket plunged further into the red yesterday as the US sovereign-debt crisis continued.

By InvestSMART · 29 Jul 2011

By InvestSMART ·
29 Jul 2011

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THE sharemarket plunged further into the red yesterday as the US sovereign-debt crisis continued.

The so-far fruitless negotiations have sparked fears among investors that ratings agencies may cut the US credit rating even if Congress and the White House reach agreement on the country's debt ceiling by Tuesday's deadline.

Overnight on Wall Street, the Dow Jones dropped

1.6 per cent and the broader S&P 500 Index lost 2 per cent. The more volatile Nasdaq market fell 2.7 per cent.

Australian stocks followed suit. The S&P/ASX 200 Index finished down 73.6 points, or 1.6 per cent, at 4463.8.

Arab Bank of Australia treasury dealer David Scutt said the US woes were beginning to cause panic among investors. Concerns about a downgrade in the US credit rating would have far-reaching consequences.

"Whilst it looks like policymakers will eventually put a deal on the table that will get approved, it really comes down to ratings agencies as to whether that will be enough to keep the AAA credit rating status," he said.

"That's what the markets are a little bit more concerned about."

The Australian market's sector indices all lost ground, with materials the worst performer, down 1.9 per cent.

Mr Scutt said concerns about poor bank earnings in Europe also weighed on the market. The financial sector shed 1.5 per cent.

CMC Markets chief analyst Ric Spooner said the release of unexpectedly high inflation figures on Wednesday continued to plague Australian stocks. The Reserve Bank was widely expected to raise interest rates "as soon as the economy starts to pick up enough to justify it", which would be another negative for the banks, reducing demand for credit.

The RBA board will meet on Tuesday to discuss its position on interest rates.

Index heavyweight BHP Billiton was the day's biggest loser, shedding 97? to $42.03. Rio Tinto fell $1.39 to $81.20.

The big four banks also slid, Westpac losing 37? to $20.65, ANZ 29? to $20.99, NAB 27? to $24.18 and Commonwealth 38? to $49.44.

Wesfarmers fell 72?, or

2.4 per cent, to $29.37 despite annual sales results showing a 6.7 per cent lift at its Coles supermarket chain. Myer dropped 10?, or 4.1 per cent, to a record low of $2.33.

Macquarie Group dived $1.34, or 4.6 per cent, to $27.99.

A dip in gold sent goldminer Newcrest down 33?, or 0.8 per cent, to $40.17. At the close of Australian trade, spot gold was down $US9.76 at $US1614.69 an ounce.

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Frequently Asked Questions about this Article…

What caused the recent sharemarket plunge and why are investors worried about the US debt ceiling?

The market fall was driven by the US sovereign-debt standoff and fears that ratings agencies might cut the US credit rating even if lawmakers agree on the debt ceiling. That uncertainty, combined with investor concern about broader economic impacts, sparked panic and a sell-off in global and Australian markets.

How did US stock markets perform overnight and what does that mean for global markets?

Overnight on Wall Street the Dow Jones fell about 1.6%, the S&P 500 lost roughly 2%, and the Nasdaq dropped around 2.7%. Those declines helped push Australian stocks lower, showing how US market stress can quickly feed through to global and local markets.

How did the ASX 200 and main Australian sectors fare during the sell-off?

The S&P/ASX 200 finished down 73.6 points, or about 1.6%, at 4,463.8. All sector indices lost ground, with materials the weakest (down about 1.9%) and the financial sector also under pressure, shedding around 1.5%.

Which large Australian companies were hit hardest in the downturn?

Index heavyweight BHP Billiton was the day's biggest loser, finishing at $42.03. Rio Tinto fell to $81.20. The big four banks also slid to new levels: Westpac $20.65, ANZ $20.99, NAB $24.18 and Commonwealth Bank $49.44. Other notable moves included Wesfarmers at $29.37, Myer at a record low of $2.33, Macquarie Group at $27.99 and gold miner Newcrest at $40.17.

What role did inflation data and RBA rate expectations play in the market reaction?

Unexpectedly high inflation figures increased concerns that the Reserve Bank of Australia could raise interest rates when the economy strengthens. Higher rates are seen as negative for banks because they can reduce demand for credit, adding downward pressure on financial stocks ahead of the RBA board meeting.

When is the RBA meeting mentioned in the article and why does it matter to investors?

The article notes the RBA board was scheduled to meet on Tuesday. Investors watch RBA meetings closely because decisions or guidance on interest rates can affect bank profitability, consumer borrowing, and overall market sentiment.

How did movements in gold and commodities affect mining stocks in the report?

A dip in the gold price weighed on gold miners — Newcrest fell to $40.17 after spot gold dropped about US$9.76 to US$1,614.69 an ounce. More broadly, materials were the worst-performing sector, reflecting commodity sensitivity to global risk sentiment.

What should everyday investors keep an eye on during this period of market volatility?

Investors should monitor the US debt ceiling negotiations and any signals from ratings agencies, watch inflation data and the RBA's decisions, and track sector-specific moves — especially in materials and financials — since these were most affected in the sell-off described in the article.