Close Australian stocks staged a spectacular recovery today, reversing a massive slide to end higher, as margin-call selling faded and amid hopes the US Federal Reserve may announce a further round of stimulus after its meeting overnight.
After sinking more than 5.5 per cent in morning trade, the benchmark S&P/ASX200 index performed a stunning turnaround during the afternoon to close up 48.7 points, or 1.2 per cent, at 4034.8, posting its first gain in six days. The broader All Ordinaries index gained 40 points, or 1 per cent, to 4096.7.
The market added about $12 billion today, but is still down more than $120 billion since last Tuesday when the selloff started.
Today's revival, though, may be short-lived, with European markets turning sharply lower in mid-morning trade. The Europe Stoxx50 index was recently down 3.6 per cent on investor scepticism that authorities will be able to restore market confidence. Australian share futures were down about 1.3 per cent, or 51 points, to 3950.
The earlier turnaround for Australian stocks was led by financial stocks, which rallied 2.1 per cent, and materials, up 1.3 per cent.
Regional markets also stabilised after earlier dramatic falls, but most were still in the red. South Korea’s Kospi was off 3.6 per cent at 1801.35 after plummeting nearly 10 per cent in the morning and Japan’s Nikkei 225 stock average pulled back to close down 1.7 per cent after tumbling more than 4 per cent.
However, in a worrying sign for global markets, European stocks reversed opening gains to extend a seven-day losing streak. London’s benchmark FTSE 100 index slumped 4.2 per cent to sink below the 5000-point mark, Frankfurt’s DAX 30 shed 5.4 per cent and the Paris CAC 40 lost 3.3 per cent in mid-morning trade.
Dow futures also turned lower, losing 51 points to 10,668, indicate a weak opening on Wall Street.
All eyes on the Fed
‘‘You’ve needed a circuit breaker after the freefall we’ve experienced over the last few days, and it’s likely to come in the form of government intervention,’’ said Jason Teh at Investors Mutual in Sydney. ‘‘At the end of the day, stocks are companies, and companies are worth something, and it gets to a level where governments intervene and stocks begin to rally.’’
IG Markets analyst Chris Weston said rumours of another round of Fed stimulus had buoyed local shares mid-session.
The US Federal Reserve is schedule to meet overnight and chairman Ben Bernanke will release a statement after the one-day meeting ends, with a number of analysts concluding there will be suggestions of a further round of quantative easing, or QE3.
"There seems to be some optimism coming through markets that Bernanke might outline plans for a QE3 package this evening," said Mr Potter.
We were so oversold it was unbelievable. You can have these completely radical moves from time to time.
A third round of US quantative easing, after two earlier programs enacted by the Fed, would involve effectively printing money to artificially boost the US economy's growth. QE typically supports stocks and devalues the US dollar.
"Even if [Mr Bernanke] does mention this, there will be a lot of speculation as to whether or not it will actually make much difference given the wildly divergent views as to the effectiveness of the previous packages," said Mr Potter, who described the change in market direction as "incredible".
"Volatility is the way forward," he said. "This is a trader's paradise. This is where fortunes are made or lost.
"We were so oversold it was unbelievable. You can have these completely radical moves from time to time."
The market's recovery helped the dolllar regain some ground. The Aussie was recently trading at $US1.012, after falling as low as 99.3 US cents. It was also buying 71.2 euro cents, 61.9 pence and 78 yen.
'Extraordinary volatility'
"Not even in the global financial crisis did we see this extraordinary volatility," said RBS Australia's head of Sydney sales trading, Justin Gallagher, after a day in which the market suffered its largest intraday fall since late 2008.
Traders and analysts said that heavy selling on the opening was due to investors facing margin calls as the value of stocks declined, but that effect had faded by late morning.
"It has bounced so aggressively. There has been reasonable buying throughout the day, but now the selling has completely evaporated," Mr Gallagher said.
Traders also said Chinese inflation data released during the session had given some hope that consumer price rises there had peaked, with non-food inflation lower than the prior month.
The banking sector led the turnaround, with Commonwealth Bank up 2.2 per cent at $46.60 after falling to a low of $43.41.
'Classic relief rally'
While this morning’s early losses were partly attributed to margin calls, IG Markets market strategist Ben Potter described the afternoon turnaround as ‘‘a classic short covering relief rally’’.
Traders were aggressively looking to take profits on their short positions, Mr Potter said.
CMC Markets sales trader Ben Taylor said the market seemed to rest its hopes on the Chinese to see us through global economic woes.
‘‘It’s obvious that traders feel our market is well oversold,’’ Mr Taylor said. ‘‘Fortune definitely favoured the brave today. Those willing to dip their toe back in were generously rewarded.’’
Gold stocks shone after the price of the precious metal hit a new record high of well over $US1700 per ounce. The spot price of gold in Sydney jumped to $US1,747.30 per ounce, up $US37.12 from Monday’s local close.
Philippines-focused gold miner OceanaGold Corp was the best performing stock in the S&P/ASX200 index, finishing up 19 cents, or 9.95 per cent, at $2.10. Burkina Faso-focused gold explorer Gryphon Minerals also performed strongly, gaining 9.3 per cent to $1.65, but Australia’s largest gold miner, Newcrest, eased 10 cents to $38.72.
BHP struggles
Sharemarket heavyweight BHP Billiton was down 45 cents, or 1.2 per cent, at $37.05 while Rio Tinto advanced $1.11, or 1.6 per cent, to $69.74.
Making headlines, National Australia Bank said it is on track to deliver an annual profit higher than $5.5 billion after a strong June quarter earnings result emphasised the return of margin growth for the bank. NAB finished up 60 cents, or 2.87 per cent, at $21.50.
Coca-Cola Amatil will consolidate three SPCA Ardmona manufacturing sites in Victoria into two, after reporting a 27.8 per cent fall in first half net profit. The soft drink supplier also said it would re-enter the beer market despite having to give up its beer operations if SABMiller succeeds in its takeover bid for Foster’s Group.
Coca-Cola Amatil finished 17 cents stronger at $10.69.Preliminary national turnover was 4.23 billion securities worth $10.4 billion.
Overnight carnage
US shares plunged overnight, taking the S&P 500 down more than 6 per cent on growing fears of a recession, exacerbated by the loss of the country's pristine triple-A credit rating.
Panicked selling on heavy volume resulted in the S&P 500's worst day since December 2008, with every share in the benchmark index ending in negative territory.
The Dow Jones Industrial Average closed at a new 10-month low after posting the index's steepest one-day drop since 2008.
Many market weatchers fear S&P's move will exacerbate the US economic slowdown by further undermining business and consumer confidence, possibly tipping the country back into recession.
Britain's FTSE 100 index closed down 3.4 per cent, France's CAC-40 slid 4.7 per cent, Germany's DAX tumbled five per cent and Greece's main stock market was the worst-performing in Europe, plummeting 6 per cent.
Analysts declared Australia a bear market yesterday after the S&P/ASX200 fell below 4000 points for the first time in two years, describing the selloff as a crisis in investor confidence.
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AAP, Reuters, with BusinessDay