Faced with a darkening outlook for global growth, the Reserve Bank of Australia opened the door to rate cuts and backed down from its recent anti-inflation rhetoric, sending the Australian dollar to a fresh one-year low.
Other regional currencies, including the Korean won, slumped, and copper traded as much as 4.0% lower. Oil prices fell more than $1.00.
Heightened fears of a possible Greek debt default gripped markets and sent Wall Street plunging Monday, after euro-zone finance ministers delayed the approval of a much-needed loan disbursement at a protracted meeting Monday.
"Unfortunately for investors the start of a new quarter has not heralded a change in sentiment with the market continuing to grapple with Greece's debt predicament and concerns of a broadening global slowdown," said Cameron Peacock, market analyst at IG Markets in Sydney.
South Korea's Kospi tumbled 5.0% after falling as much as 6.3% earlier, nearing levels last touched more than a year ago, playing catch up to the region's sharp losses Monday when the local market was closed. Australia's S&P/ASX 200 was down 0.6% in choppy trade, while Japan's Nikkei Stock Average lost 1.3%, and Hong Kong's Hang Seng Index shed 1.6%. China's markets were closed for a holiday.
Dow Jones Industrial Average futures were up 26 points in screen trade.
In Sydney, shares fell despite the central bank turning more dovish in its statement after it kept interest rates on hold at 4.75% at its rate-setting meeting, as stocks tracked declines in the Australian dollar. The Australian dollar touched a fresh one-year low of US$0.9453, from US$0.9520 before the RBA decision.
"It's a massive back flip by the RBA. They have backed off their concerns about inflation and wages and opened the door for rate cuts. I think the share market has got this completely wrong by selling off on the decision. The market is just frustrated it didn't happen today," said Bell Potter managing director Charlie Aitken.
Stocks in Seoul suffered a broad selloff reflecting the local economy's sizable exposure to offshore markets with data showing local manufacturing activity contracted in September. The weaker local currency helped some exporters to outperform the index's drop, with Samsung Electronics down 2.4%, but chemical plays were hard-hit amid demand concerns, with SK Innovation tumbling 10.6%.
The Korean won slumped to fresh 2011 lows against the greenback, prompting dollar-selling intervention from the Bank of Korea. The dollar was recently at KRW1,191.32.
The nation’s dollar fell to the lowest since September 2010 against its U.S. counterpart after the RBA cited “very unsettled” global financial markets and signs of weaker domestic growth. Investors raised to 86 percent the chance that Stevens will lower borrowing costs by 50 basis points, or 0.5 percentage point, next month, according to cash rate futures.
‘Door is Open’
“The door is open to rate cuts if need be -- whether that’s because the global situation deteriorates further or the unemployment rate shifts into a higher range,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at RBC Capital Markets in Sydney. “The RBA’s signaling it’s a bit more comfortable on the inflation front.”
The Australian currency fell, trading as low as 94.56 U.S. cents in Sydney from 95.27 cents yesterday in New York and 95.09 cents before the decision. At 6:05 p.m. in Sydney, it fetched 95.20 cents. The local dollar last month dropped by 9.8 percent, the steepest monthly decline since October 2008.
Since the RBA last met on Sept. 6, a government report showed monthly employment growth averaged 2,800 from January through August, less than a 10th of the average of 30,500 in the first eight months of 2010. Australia’s unemployment in August rose for a second straight month, reaching a 10-month high of 5.3 percent.
Today Stevens called the labor market “a little softer” and said consumers are “more concerned about the possibility of unemployment rising.” A weaker job market reduces the likelihood of a “significant acceleration” in labor costs in industries that aren’t benefiting from a mining boom, the RBA governor said.
“While there remain good reasons to expect solid growth over the medium term, the indications are that the pace of near- term growth is unlikely to be as strong as earlier expected, due both to local and global factors, including the financial turmoil and related effects on business confidence,” he said.
The central bank, which last raised rates in November, has balanced inflation driven by resources investment and a stronger currency that’s hurt manufacturing jobs and damaged confidence.
The so-called Aussie dollar, the world’s fifth-most traded currency, has dropped 14 percent from its record-high $1.1081 reached July 27 as speculation mounts that Greece will default and spur a repeat of the 2008 credit freeze that followed the collapse of Lehman Brothers Holdings Inc.
Trade Windfall
Government reports earlier today showed the strength of the nation’s mining industry and signaled a rebound in building approvals.
Australia’s exports surged in August to a record A$28.4 billion ($27 billion) on coal shipments, and the nation’s A$3.1 billion trade surplus was the second-widest on record. A separate release showed the number of permits granted to build or renovate houses and apartments jumped 11.4 percent from July, the biggest increase since March 2010.
“Australia’s terms of trade are very high, which has increased national income considerably,” Stevens said today, referring to export prices relative to import prices. “Investment in the resources sector is picking up very strongly.”
Stevens reduced rates from 7.25 percent to a 49-year low of 3 percent from September 2008 to April 2009 as the collapse of Lehman worsened a global financial crisis.
The RBA boosted its rate seven times from October 2009 to November 2010, tempering a rise in consumer debt, which more than tripled in the past 20 years to 153.7 percent of disposable income in the second quarter.
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