Market Dives As Investors Take Fright At Prospect Of Lower Growth

The Age

Tuesday November 21, 2006

STEPHEN McMAHON, With TIM COLEBATCH

FEARS of a slowdown in consumer spending in the US in the run-up to Christmas, and its knock-on effect on Asian exporters and the Australian commodity stocks that fire the furnaces, pushed the market to its biggest one-day fall in nearly three months.

The dive also followed a stark warning by the world's leading central bankers at the G20 meeting in Melbourne at the weekend that they planned to "normalise" interest rates to counter inflationary pressures.

Delegates including such heavyweight as US Federal Reserve chairman Ben Bernanke, European Central Bank president Jean-Claude Trichet and Bank of Japan governor Toshihiko Fukui pledged to "take advantage of the present strength in the global economy to get policy settings right".

"Faced with potential inflationary pressures, the normalisation of monetary policy under way in many G20 countries will need to continue", they said, adding that fiscal policy should also be tightened in countries with budget deficits.

The International Monetary Fund's managing director, Rodrigo de Rato, also warned that rising inflationary pressures and current account imbalances required central banks to rein in excess demand.

This traditional scare mongering from the G20 bosses combined with a fall in new housing starts in the US during October to their lowest level since July 2000 sent the S&P/ASX 200 down 97.3 points to 5322.4 - its lowest closing price in more than three weeks.

The commodity sector, banks and retailers were the hardest hit as investor confidence in the recent bull run sagged. In the latest session, investors wiped about $20 billion off the market's value. Since late September, the benchmark index had climbed 10 per cent, reaching a record 5491.6 points earlier this month.

But Colonial First State head of investment markets research Hans Kunnen said it was not the beginning of the end and he expected some recovery today.

"It was just a blip," Mr Kunnen said. "The economy is still firm, interest rates are still relatively low, price earnings are still relatively low - a bull run doesn't end when the market has a forward price-earnings of about 14 or 15 times. But the housing figures led to investors thinking a weaker US was bad for resources, and selling to raise cash for T3 caused heavy selling."

Even the surge in Seven Network shares after the media group announced plans to enter into a $4 billion joint venture with private equity giant Kohlberg Kravis Roberts was not enough to counter the market's downward momentum. This deal has turned Kerry Stokes' Seven into one of the biggest predators in the reshaping media market and sent the stock up $1.22, or 11.5 per cent, to $11.80.

Potential takeover targets Fairfax Media, Network Ten and West Australian Newspapers, in which Mr Stokes already has a 14.9 per cent stake, jumped after the deal was announced. WAN closed at a record $10.75, up 16?, and Ten climbed to a 12-month high of $3.60 before slipping back to close at $3.44, up 5?. Fairfax , owner of The Age, rose to $4.89 before closing unchanged at $4.82.

The banks were big losers in the downturn, providing four out of the five biggest fallers in the index. National Australia Bank, led the market down, shedding $1.09 to $38.16, Commonwealth Bank dropped $1.05 to $47.15, Westpac lost 45? to $23.76 and ANZ fell 62? to $27.87.

Jitters about the prospects for global economic growth were not limited to Australian investors. Most Asian markets fell heavily despite US investors on Friday holding their nerve following the release of the US housing data - the Dow Jones closed higher for the sixth session in a row. Yesterday all markets in our region except China and Indonesia lost ground, with Japan's Nikkei 225 falling 2.27 per cent and Hong Kong's Hang Seng losing 1.2 per cent.

Telstra had a mixed day as the T3 shares made their debut. The telco's instalment receipts, which were the most traded stock of the day, closed at $2.18 - up from the retail investor price of $2 and the $2.10 paid by institutional investors.

Telstra's regular shares closed at $3.63, down 12? - their biggest one-day fall since late August.

But T3 debut helped push the Australian dollar up past the US77? mark, though it fell back to US76.87? at 5pm, still up from last week's close of US76.62.

The market was also weighed down by Macquarie Bank, Orica and Rinker trading ex dividend.

Housing materials provider Rinker, which earns about 80 per cent of its profits in the US, was also pulled down by the slowdown in housing starts. It tumbled 24? to $18.51, which may bolster Mexican cement giant Cemex's chances of success in its $16.8 billion takeover battle.

Investor worries that the recent huge growth in commodity prices would ease in response to lower global economic growth sent BHP Billiton and Rio Tinto down. BHP, the world's biggest mining company, lost 44? to $26.05 while Rio gave up $1.82 to $73. -- With TIM COLEBATCH

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