Markets Mauled

The Age

Wednesday January 23, 2008

By Vanessa Burrow, Markets Reporter

"OH WOW" was all one trader could say as the Australian sharemarket plummeted more than 7%, notching up its biggest one-day fall in almost 20 years.

Investors have endured a record-breaking 12 consecutive days of falls, falls that have vaporised about $300 billion in sharemarket value.

The Australian market, like about half the world's major markets, has officially descended into a "bear" market, having fallen more than 20% from its November 1 record high.

That takes the losses on Australia's top 200 stocks to about $500 billion, or 24%, since the S&P/ASX 200 Index topped 6800 points.

Yesterday, the index fell 7.05% to 5186.8 points, the most in its history. Last year's gains have disappeared and the benchmark index is at its lowest in about 16 months. The older All Ordinaries Index lost 7.3%, the most since October 1989.

Market expectations of a February interest rate rise shrivelled, and it seems the Reserve Bank will leave interest rates on hold early next month even if today's consumer price index data shows core inflation is above the RBA's target band of between 2% and 3%.

In the US, the pundits were predicting the US Federal Reserve would cut interest rates by 75 basis points, rather than by 50 basis points.

Japan's market fell 5.7% and Hong Kong investors were 8.7% poorer. Indian officials urged calm - and temporarily closed the sharemarket - in an effort to halt intraday falls of up to 13%, the most in 16 years.

European markets headed lower last night and, after avoiding the mayhem because of a public holiday, US markets were also expected to plunge. It seems President George Bush's plan to inject about $US145 billion into the US economy via tax cuts and other measures has not improved market sentiment.

Yesterday Australia's biggest companies were butchered. Rio Tinto lost 11.6% of its value, Macquarie Group sank 11.4%, AMP lost 10.3%, Woodside Petroleum fell 10% and the newer Telstra shares were cut by 8.5%.

Rough calculations show more than $5.8 trillion has been slashed from global sharemarkets so far this year.

Pengana Capital global head of real estate Stuart Stuckey said there was a lot of forced selling on the market, as investors with margin loans struggled to meet their obligations. But there was also some panic and disbelief, and investors were selling quality stocks at knockdown prices.

"We have got this contagion effect, and all the companies are being caught up in the sell-off," Mr Stuckey said. "I think 'Oh wow' says it all."

Perennial Asia head of Asian and Japanese Equities Diane Lin said rumours the Chinese Government was about to check all domestic banks for exposure to the US subprime mortgage market added further pain in Asian markets. Analysts already assume the People's Bank of China has lost money on the high-risk investments. And, Ms Lin said, any company with even distant ties to the subprime market was being punished.

"There's a lot of retail investors (in China) and they really panicked," she said. "Sentiment is so poor, it's very tricky to say anything negative."

The Australian dollar, which thrives on market confidence, has lost almost US3? in two days, falling from a high of US88.2? to a low of US85.13?.

And it was dramatically lower against the low-yielding yen, falling about Y4 to a low of Y90.15. However last night, the dollar gained against the yen, after the Bank of Japan decided to leave interest rates on hold, at the very low rate of 0.5%.

Gold has fallen from a high of $US914.30 an ounce, back to about $US858 an ounce. And oil futures are back below $US90 a barrel, falling as low as $US88.09 a barrel, after spending nearly a month moving between $US90 and $US100.

In contrast, the credit default swap market is booming.

Credit default swap (CDS) prices rise when investors believe there is a greater chance of a company defaulting on its fixed-income obligations.

Earlier this week the iTraxx Australia Index, which tracks the movements of CDS prices for 25 of the country's most liquid stocks, rose to a record 111.97 points. It is the highest since the index started in 2004.

nabCapital fixed income research senior analyst Ken Hanton said the CDS market was a good indication of market sentiment. "This is just taking no prisoners here," said Austock senior client adviser Michael Heffernan. "The market is in a very negative frame of mind."

But Mr Heffernan said the sharemarket rout was different to the 1987 crash, when about a quarter of the sharemarket's value was wiped out in one day.

"That really knocked people on the floor, they were really out for the count," he said.

Pengana Capital's Mr Stuckey agreed. "Some might say this looks a bit like '87," he said. "I wouldn't say so . . . this looks a lot like 2001 to me, when global growth was decreasing and central banks were moving very quickly to cut interest rates."

Pengana Capital institutional business consultant Denis Carroll said the situation was "fairly ugly", but not unprecedented.

"This is not the time to panic because all you do is compound your losses," he said. "It's a very high-risk strategy to jump ship."

"Long term, equities offer a better return versus property versus bonds versus cash. Equities seriously outperform every other asset class."

© 2008 The Age

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