Index Falls In Sympathy As Us Financials Take A Pounding On Losses

The Age

Wednesday June 4, 2008

Vanessa Burrow

THE fragility of investor sentiment is being demonstrated worldwide as the US subprime mortgage crisis continues to weaken bank stocks.

In Australia, the benchmark S&P/ASX 200 Index suffered its biggest one-day fall in six weeks, as financial stocks tumbled in sympathy with US counterparts.

The market fell 88.1 points, or 1.6%, to 5574.2 points, while the 50-member financials index lost 2.4%, after Monday's 1.9% dive (see graph below).

Overnight, the Dow Jones Industrial Average and the S&P 500 Index had both fallen 1.1%, with investors spooked by developments at Wachovia Corp, one of the biggest banks in the US.

Prompting speculation of additional write-downs, the company forced chief executive Kennedy Thompson to step down. Shares sank to a 13-year low.

Similarly, talk of further losses was damaging for investment banks Morgan Stanley, Merrill Lynch and Lehman Brothers. And market volatility, as measured by the Chicago Board Options Exchange Volatility Index, jumped more than 11% to a one-month high.

Australian banks have repeatedly stated they have little or no exposure to US subprime investments. But, they too suffered yesterday, even as the Reserve Bank maintained the country's official interest rate of 7.25%.

Investment bank Babcock & Brown tumbled 95?, or 7.9%, to $11.11 and Macquarie Group shares declined by $3.20, or 6%, to $50.06.

But the worst performer in the sector was the beleaguered Allco Finance Group, which plunged 11%. Shares that were once valued at more than $13 are now worth only 36.5?.

Among the Big Four banks, National Australia Bank lost $1.06 to $29.37, Westpac fell 88? to $21.79, ANZ was down 52? to $20.38 and Commonwealth Bank fell 46? to $41.49.

St George fell a further $1.81, to $30.14, worsening what has been a rough start to the week, and QBE Insurance fell 75? to $24.10.

In his statement, RBA Governor Glenn Stevens said the evident "substantial tightening in financial conditions' had helped to contain economic activity.

"While labour market conditions to date have remained strong, indicators of household spending have recorded subdued outcomes over recent months, and credit expansion to both households and businesses has weakened significantly," he said.

However, building approvals rose by a larger-than-expected 7.8% in April, in part because apartment approvals bounced back after falls over the past four months.

The Australian dollar was buoyed by the building approvals figures, but then pushed down again just as quickly with the release of Governor Stevens' comments. Last night, as European markets opened mixed, it moved above US96?.

Back on the market and resource stocks, barring BHP Billiton, added to the gains yesterday. Fortescue Metals gained 50? to $11.74 and Newcrest Mining added $1.36 to $33.

The ever-popular CSL, which continues to show up on equity strategists' "recommended" lists, gained 75? to $39.88. And Incitec Pivot kept marching towards $200 a share, gaining $5.04 to $177.64.

Metcash shares rose 12?, or 2.9%, to $4.20 after it announced second half profit had risen 11% to $111.3 million.

Uranium explorer Bannerman Resources, which has projects in Namibia, Botswana and Australia, was the best performer among the All Ordinaries. It gained 29?, or 14.9%, to $2.24.

LINK

? To read Wachovia Corp's full announcement, go to tinyurl.com/6ys94k

© 2008 The Age

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