Fears Set Investors Panicking To Grab Cash

Sydney Morning Herald

Saturday October 11, 2008

Jacob Saulwick and Matt O'Sullivan

INVESTORS are betting on a deep and sustained period of low economic growth in Western economies as banks withhold credit, prompting dramatic falls on world equity markets.

An 8per cent fall in the Australian sharemarket yesterday was the second-worst trading day in its history, wiping more than $95 billion from the value of the market. In the bleakest week since 1987, the index closed below 4000 points for the first time since 2005.

"This is capitulation," one broker said. "I look down at my screen and I can't recall seeing a day when BHP's down 7 per cent, NAB's down 8 per cent, the real estate sector has fallen in a heap."

After a 7 per cent drop on Wall Street overnight, the fall in the local exchange was broadbased. More than 700 companies hit lows of a year or more as concerns about the immediate fragility of the financial system coincided with a growing expectation of a sluggish economy in the coming years.

Asian markets also tumbled, with Japan's Nikkei index closing down almost 10 per cent.

European markets opened sharply lower last night, with Britain's FTSE 100, Germany's DAX index and the French CAC index all down nearly 10 per cent in early trade.

Banking, and the money markets that smooth its operation, remains the nub of the problem. Trading in interbank markets deteriorated toward the week's end, despite a co-ordinated cut in interest rates by the world's most powerful central banks - signalling that policymakers were prepared to go to unprecedented lengths to calm the turmoil.

"Overnight it was very bad again," a nabCapital economist, David de Garis, said of the markets in which banks lend money to one another. "Liquidity is very thin. It tells you that interbank markets are still very, very dysfunctional."

The Australian sharemarket has fallen 20 per cent over the past two weeks.

The only stock among the top 100 companies not to fall yesterday was ABC Learning - which has been suspended from trading because it cannot get its books in order.

Equity market brokers said the selling was driven by panic and fear, but also by a simple need to grab hold of cash.

A senior client adviser at Bell Potter, Stuart Smith, said hedge funds were driving the selling as they came under pressure from clients to sell off their positions and redeem investments. "You've got wholesale liquidation by hedge funds," Mr Smith said.

Investors who had allocated 6 per cent to 10 per cent of portfolio for speculative trading, were telling the funds that speculated on their behalf to sell out.

"Now they're saying, whatever is left, I want it back please," Mr Smith said.

The benchmark ASX 200 index fell 8.3 per cent, or 360.2 points, to 3960.7 yesterday, while the broader All Ordinaries dropped 351.8, or 8.2 per cent, to 3939.5.

The Australian dollar fell 3.3 US cents to 65.95 US cents as investors bailed out of currencies perceived to be linked to strong global growth.

Financial services, resources and property were among the hardest hit. Macquarie Group slumped more than 9 per cent, or $2.98 to $28.52 and has almost halved in value in two months. The Commonwealth Bank fell 7 per cent, or $2.85, to $39.55 while ANZ dropped 8 per cent, or $1.35, to $15.30.

BHP Billiton shed 7 per cent, or $2.10, to $27.74, and Rio Tinto dropped 6 per cent, or $5.01, to $73 on concerns iron ore and coal prices will fall next year due to demand moderating in China.

Fortescue Metals Group fell almost 19 per cent, or 62c, to $2.68. The drop takes Fortescue's losses to 70 per cent in the past two weeks, leaving it languishing at a level which could trigger margin calls.

Listed property also came under fire. Even Westfield, a relative pillar of strength recently, fell 9 per cent, or $1.49, to $14.78. FKP Property Group, which six weeks ago rebuffed a $5-a-share takeover offer from Lend Lease, fell more than 29 per cent, or 62c, to $1.50.

"It looks like people are just selling everything - anything with a flavour of debt is on the nose," said Nomura Australia's market strategist, Eric Betts.

"It's really defying logical explanation - people are just extremely nervous about what is going to happen. It looks like Voldemort is back, rampaging."

The falling sharemarkets even prompted one market economist, Craig James of CommSec, to call on governments to intervene by buying shares to stop the rot and restore some confidence.

© 2008 Sydney Morning Herald

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