Stocks sink to 3-year low Chris Zappone October 6, 2008 - 12:14PM Update The Australian stock market sank to its lowest since late 2005 as investors became more gloomy about prospects at home and abroad. The dollar also slumped to its weakest against the US dollar in two years.
In early afternoon trade, the benchmark S&P/ASX 200 index was down as much as 141 points, or 3%, to 4554.3. The slide took the index below the 4,600-point level touched during last month's market panic after the failure of US investment bank, Lehman Brothers. Shares continue to be buffeted by worries about the weak US economy, the efficacy of the $US700 billion ($900 billion) financial markets rescue plan, and concern about how the spreading crisis will hurt Australian companies, said James Drohan, private client adviser at Ord Minnett. "The bail-out will probably work but it won't be a quick fix," Mr Drohan said. The package has improved the sentiment for some investors but there remains some doubt about how effective it will ultimately be in resolving the banking crisis, he said. On top of the US Government's action last week, worse-than-expected job losses weighed on the US market and discouraged local share investors. "As welcome as the US bailout vote measures are, there are by their magnitude and scale medium-term solutions to unclogging the world's banking system of toxic US bad mortgage loans and the heightened counter-party mistrust endemic in the global financial system at this time," said Suncorp-Metway economist Peter Pontikis in a note to clients this morning. "What we are left this quarter and maybe next is a US economy to all intents (finally) in a recession as evidenced by manufacturing, retail sales and now labour market measures." NAB leads retreat National Australia Bank lost as much as $1.08, or 4.1%, to $25.07, leading financial stocks lower. Westpac also slumped as much as 61 cents, or 2.6%, to $22.60, while ANZ shed 51 cents or $2.7%, to $18.20. Commonwealth Bank sank $1.31 cents, or 2.9%, to $43.70. Suncorp-Metway bunked the selling trend after the insurance and banking group said it had received several approaches from parties interested in buying its banking and wealth management operations. Suncorp shares rose 69 cents, or 6.9%, to $11.37. CSL, a blood products producer, shaved the most from the index, losing $2.59, or 6.4%, to $37.98. Mining giant BHP Billiton fell 42 cents. 1.4%, to $30, while rival Rio Tinto declined $3.20, or 3.6 %, to $85.71. "I think it is the headlines: recession, recession, recession,'' said Bell Potter senior adviser Stuart Smith. "My target on the S&P this morning was 4580 and then 4519. So we are edging towards that 4580, where we were on December 9, 2005.'' Making news today, Santos, Australia's third biggest oil and gas producer, has completed a $300 million buyback of its shares. Santos was up 5 cents to $17.69. Spot gold was trading in Sydney at $US827.00 an ounce, down $US13.85 on Friday's close of $US840.85. Dollar tanks The dollar sank below 76 US cents, its lowest in two years, down from a high of 78.17 US cents on Friday, as investors bet Australian interest rates will fall tomorrow when the RBA meets. Mr Drohan said currency investors had already priced in the expected 50 basis point cut tomorrow from the Reserve Bank, and it was fears for profits at Australian companies' profits that the Aussie down. Fears of a global slowdown have driven up expectations that Australia's interest rate will ease, possibly to 6.5% from 7%. The market fully expects a 25 basis point cut tomorrow, and has put the chance of a 50-point cut at 91%, according to the Credit Suisse interest rate price index. The same gauge sees interest rates standing at about 5.5% within a year. "Recent analysis from the IMF suggests major periods of financial stress can take up to four years to recover from, and can cut around 5% from an economy's growth," wrote ANZ economist Katy Dean in a note to clients Friday afternoon. "In these circumstances, the current tight monetary policy settings in Australia are not appropriate... We believe an aggressive move from the RBA is warranted." "We expect the bank to cut interest rates by 50bp at next week's board meeting." Europe woes The bad news is by far not contained to contained to the US, as Europe debates what response it should take to the global banking crisis. In addition to the German government's guarantee for private accounts over the weekend, Bonn is leading talks to orchestrate a $62 billion bail out of Hypo Real Estate Holding. The move could add pressure to the UK to offer further guarantees to its banking sector. And the prospect of a rebound in the US markets as the details of the bail-out are mulled by American investors look slim. Dow futures were down 177 points, to 10,187 points, Sunday evening New York time, according to data from Bloomberg. 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