Published in The Age, January 2008
A year's worth of gains have been eliminated from the Australian sharemarket, with the benchmark index again below 6000 points.
The S&P/ASX 200 Index fell to 5981.6, its lowest close since mid-August, as news emerged that US brokerage firm Merrill Lynch was expected to lose $US15 billion on risky mortgage investments.
Merrill Lynch and Citigroup are reportedly on the hunt for capital from foreign investors, but the latest report from The New York Times suggests Merrill's losses will be almost double its original estimate.
The reaction on the Australian sharemarket was swift. After an early 18-point rise to 6000.2 points, the market rapidly descended, losing a total of 97.1 points, or 1.6%.
The benchmark index has fallen 12.4% since reaching a record close of 6828.7 on November 1. A fall of 10% is defined as a "technical correction".
It first closed above 6000 points on February 22, but fell as low as 5483.3 in August when the scale of the subprime mortgage crisis sent stocks reeling on markets around the world.
Since then some of the world's biggest banks have made massive write-downs, tainting Australian financials by association.
In the past week, Australia's major banks have also raised their standard variable interest rates independently of the Reserve Bank, and rejected concerns about loans of hundreds of millions they have made to troubled US mortgage lender Countrywide Financial.
Yesterday Commonwealth Bank lost $1.06 to $55.89, Westpac closed 60¢ lower at $26, ANZ lost 39¢ to $25.71 and National Australia Bank fell 12¢ to $35.20.
But reports that Bank of America was closing a deal to acquire Countrywide settled some nerves, and helped the Dow Jones Industrial Average gain almost 1% yesterday.
Deutsche Bank foreign exchange strategist John Horner said the news, and subsequent market positivity, also helped the Australian dollar stretch as far as US89.76¢, an eight-week high.
A speech by US Federal Reserve chairman Ben Bernanke also boosted the Aussie, because it solidified expectations of a 50-basis-point cut in US interest rates late this month.
It also encouraged speculation that the US might be entering a recession, speculation that has been encouraged by dire predictions from US investment banks including Merrill Lynch and Goldman Sachs.
However, Mr Horner said that while the Australian dollar would probably remain strong against.
To keep track of your investment universe using a portfolio tracker and other analytical tools go to the age.com.au/businessday the greenback, it was less likely to hold its ground against other currencies.
Last night it was buying ¥97.3, 45.84 British pence, 6.49 Chinese yuan and 60.5 euro cents.
CommSec chief equities economist Craig James rejected assertions that a US recession was inevitable. He said the Fed might even cut interest rates before its next meeting due at the end of the month, if it considered it necessary to avert an economic downturn.
Austock Securities senior client adviser Michael Heffernan said talk of a US recession was "ridiculous". "You would think it's a foregone conclusion," he said. "But not everything is going over the recession cliff."
Mr Heffernan noted that RAMS Home Loans, which was caught when short-term money lending markets froze over last year, had secured $750 million in funding.
The stock gained 1¢, or 3.7%, to 28¢, although it is still way below its float price of $2.50 a share.
Listed property trusts Centro Property Group and Centro Retail Group went into a trading halt after diversified financial MFS approached it with an offer to manage unlisted property funds worth $8.5 billion.
MFS, which traded as normal, fell 39¢, or 10%, to $3.55. On Wednesday the stock had sales up to $4.35.
Civil engineering and contract mining company Macmahon Holdings dropped 15¢, or 9%, to $1.52 and Brambles fell 30¢6¢ to $10.25.
In contrast, micro-cap brain monitoring technology company BrainZ Instruments jumped 8.5¢, or 77.3%, to 19.5¢ on small volumes. The stock has traded in a range between 50¢ and 11¢ over the past year.
Another big gainer was iron ore explorer Fortescue Metals, which rose 40¢, or 6.5%, to $6.59 after confirming it was planning to make its first iron ore shipment in May. Asciano Group rose, up 34¢, or 5.8%, to $6.25 and Alumina added 8¢ to $6.23.
However, lower metals prices and a lower oil spot price of $US93.71 in New York trimmed shares in BHP Billiton, sending it down 79¢ to $38.30. Rio Tinto fell $2.40 to $125.60.
Not even a record gold price was enough to push Newcrest Mining higher, with the company losing 26¢ to $37.99. Lihir Gold added 3¢ to $3.94.
Gold climbed as high as $US897.90 an ounce, outdoing its previous highs, although the Australian dollar gold price remained just under $1000 an ounce last night, at $999.52.
Over the week, the Deloitte Victorian Index fell 4.6%, in contrast to the 5.2% fall of the S&P/ASX 200 Index. It was a loss of $26.7 billion in value, a decline that fell mostly at the feet of BHP Billiton, NAB and ANZ.
Telstra, Rio Tinto and AXA Asia Pacific were a drag on the index, which includes 173 companies headquartered in Victoria.
However, Newcrest Mining, CSL and BlueScope Steel provided some upside, collectively adding almost $900 million in market capitalisation.
CommSec's Mr James warned that next week's market action was also likely to be volatile, with a selection of economic releases due, along with earnings reports from several US banks.
But Wealth Within chief analyst Dale Gillham said that, despite the short-term gyrations, those taking a long view could still confidently invest.
"It is important to remember that the best time to buy good shares is following a market crash or a severe market pullback," he said. "For example, QBE more than halved following the September 11 attacks in 2001, but has since risen more than 500%."
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