Eric Johnston, Clancy Yeates August 6, 2011
FEAR and uncertainty swept global markets yesterday as panic spread about Europe's debt crisis and economic problems in the United States, prompting investors to wipe more than $60 billion from local share values.
The rout stoked concerns of a new global financial crisis and triggered expectations of a cut in interest rates to help prevent Australia sliding into recession.
Within minutes of opening, Australian stocks plunged more than 4 per cent, with oil and mining companies leading the market towards its biggest fall in more than 2½ years. Shares have lost more than 17 per cent from the peak in mid-April. These losses are likely to have wiped out last year's 8.9 per cent average gain in balanced superannuation funds, where most Australians have super invested.
Under pressure ... Australian stocks plunged more than 4 per cent. Photo: Reuters
Wall Street was hit by its largest sell-off since the height of the financial crisis while markets in Asia - which remain the key to global growth - were also hammered. In London the FTSE 100 was more than 100 points down in early Friday trading, but recovered on the news that the US had added more jobs than expected last month.
The Treasurer, Wayne Swan, tried to calm investors by highlighting differences between Australia and Europe and the US, but admitted the economy was not ''immune'' from global events.
''Australians should never forget that our economic credentials are among the strongest in the developed world and that Australia has a proven track record of dealing with global economic uncertainty,'' Mr Swan said.
The Reserve Bank added to the gloom, warning that a disorderly unravelling of the sovereign debt crises engulfing the US and Europe would have a ''disruptive'' effect on the world economy, weakening Australia's recovery. The central bank cut its forecast for growth this year by 1 percentage point to 3.25 per cent, blaming weak household spending and a slower-than-expected recovery in coal exports.
The benchmark S&P/ASX 200 index ended yesterday down 171 points at 4105, following a stomach-churning 4.3 per cent loss for the Dow Jones Industrial Average on Thursday.
''This is an example of clear-cut panic driving flight to safety,'' said Peter Quinton, a director of research at Bell Potter Securities.
The dollar lost its reputation as a safe haven, slumping to a fourth-month low of $US1.04. Traders said the debt market was priced as if Australia was facing recession, tipping interest rate cuts of 1.25 percentage points by April.
The market was factoring in ''at least some potential for GFC Mark II'', said Phil O'Donaghoe, a senior economist at Deutsche Bank.
The shadow treasurer, Joe Hockey, enraged the government by referring to debt-stricken Greece after being challenged on a claim that Australia's debt level was ''significant''. Mr Swan labelled the remarks ''reckless in the extreme''
