01/11/2008 (7:09 am)

Spectre of US recession sends stocks reeling

Filed under: Business, Finance, Lenders, Mortgage, News |

INVESTORS continued to pile out of stocks en masse yesterday as the sharemarket capped off its worst start to a new year in 17 years due to continuing concerns about a likely recession in the US.

The sharemarket extended its losing streak to five days after falling 1.6 per cent yesterday, taking its losses for the week to more than 5 per cent. The benchmark ASX 200 Index closed down 97.1 points at 5981.6 yesterday, while the broader All Ordinaries Index slumped 92.9 points to 6054.4.

Shaw Stockbroking’s head dealer, Jamie Spiteri, said offshore investors were continuing to reduce their stakes in Australian stocks, leaving a vacuum because of insufficient interest from local institutions.

“It’s decaying fortunes. We have an equity market here in Australia that is feeling the effects of all the global uncertainty, in particular the uncertainty out of the US,” he said. “The ripple effect of the downturn in the US just doesn’t go away.”

The banks - often safe havens in volatile periods - were among the hardest hit again yesterday as investors continued to assess the institutions’ exposure to the subprime mortgage crisis in the US and the wider credit crunch in global financial markets.

Australia’s two biggest investment banks, Babcock & Brown and Macquarie Group, fell 11 per cent and 4.5 per cent respectively over the week. Babcock dropped 80c to $22.78 yesterday and Macquarie fell $1.42 to $69.88.

Westpac and St George joined the other large retail banks yesterday by raising their mortgage interest rates 15 and 20 basis points respectively. Westpac fell 60c, or 2 per cent, to $26 and St George dropped 61c to $30.63.

Commonwealth Bankshed $1.06 to $55.89, ANZ fell 39c to $25.72 and National Australia Bank dropped 12c to $35.20 guaranteed approval cash advance loans. “The continued uncertainty attached to Centro probably doesn’t sit well with the assessment of overseas holders in our banks,” Mr Spiteri said.

The market this week recorded its second technical correction - classified as a fall of 10 per cent - in less than six months. Even the resources sector, the main driver of the past five years of growth in equities, is finding any positive news overshadowed by negative sentiment emanating from the US.

Mr Spiteri said the main reason for a decline in resource companies yesterday was not a dip in prices for some metals and oil but the dismal outlook overseas. BHP Billiton fell 79c to $38.30 yesterday, or 6 per cent over the week, while Rio Tinto dropped $2.40 to $125.60, or almost 5 per cent over the five trading days. Earlier, market strategists interpreted comments by the US Federal Reserve chairman, Ben Bernanke, as an indication the central bank will reduce rates by up to 50 basis points later this month. Dr Bernanke said the Fed was ready to take “substantive additional action as needed”.

“Yes, I am sure the Fed will reduce rates over the course of 2008 but … the horse might have bolted,” Colonial First State’s head of investment markets research, Hans Kunnen, said yesterday.

“The outlook that Dr Bernanke painted wasn’t particularly attractive to equities investment, at least in the early part of 2008. The slowdown that is currently in train will inflict pain.”

While economic data in Australia remained strong, Mr Kunnen said it hinted at higher interest rates here, “and that doesn’t go down well with investors”.