Sharemarket dives in worst day since 1987, losing $167bn

Australian shares cratered almost 10 per cent as panic overwhelmed co-ordinated efforts from central banks.

RBA governor Philip Lowe. Picture: Britta Campion

Australian shares cratered almost 10 per cent, shredding $167bn, in the biggest sell-off since the 1987 crash as panic overwhelmed co-ordinated efforts from central banks around the world to sandbag equity markets.

Monday’s brutal session drove the local bourse deeper into bear territory — down as much as 30 per cent from its record high four weeks ago. At the same time markets in Europe opened sharply lower on Monday, with London down 7.5 per cent, France off 9.5 per cent and Germany’s Dax down 8.3 per cent.

After an unprecedented 14 per cent intraday bounce on Friday as the US Federal Reserve promised $5.4 trillion ($8.7 trillion) of additional funds to prevent a credit crunch — Australia’s S&P/ASX 200 share index plunged 537.3 points or 9.7 per cent to a four-year low of 5002 points amid tougher quarantine to fight coronavirus.

The Reserve Bank issued a rare statement saying it “stands ready” to purchase Australian government bonds in the secondary market to support the smooth functioning of money markets, which had begun to seize up. The RBA said further measures would be announced on Thursday — economists widely expect an emergency 25 basis point cash rate cut and the start of quantitative easing.

In a day of high drama for investors:

• The US Federal Reserve slashed its benchmark interest rate to near zero.

• The Reserve Bank of New Zealand cut interest rates by 75 basis points.

• ASIC imposed a 25 per cent cut to the volume of trade from Friday’s high.

• Financial regulators held a telephone hook-up to co-ordinate their response to ensure the smooth running of markets.

• The Bank of Japan said it would spend $US700bn buying government bonds and mortgage securities.

• Australian banks posted double-digit share losses.

Credit Suisse macro strategist Damien Boey said it was telling that China opted to “shut down its economy before trying to stimulate it”, with a view to buying enough time to develop an effective treatment for COVID-19 and contain the problem.

“In contrast, Western policy makers have tried to stimulate their economies at the same time that they have gradually shut them down. Therefore, Western economies have neither attained containment nor economic growth.” In his view it would be better for Western policymakers to let economic activity “stop”, rather than adopt such extreme monetary policy stimulus.

“Also, it is better to allow passive and volatility-targeting trades to completely unwind, before central banks step in to stabilise markets,” he added. “Otherwise, they are fighting a losing battle, using up precious ammunition for the wrong cause, and eroding their own credibility. The erosion of credibility contributes to higher volatility, and even more market deleveraging.”

Energy stocks led broad falls in the Australian market, with Oil Search down 20 per cent, Santos down 18 per cent and Woodside down 14 per cent as Brent crude oil dived 6.6 per cent to $U31.63 a barrel — heading for its worst close in four years — as the US travel ban on Europe added to fears of a collapse in demand due to the coronavirus, amid a price war between Saudi Arabia and Russia.

Tourism-exposed stocks were also hit hard. Star Entertainment dived 24 per cent and Crown Resorts fell 11 per cent after implementing “social distancing” measures, Cochlear plunged 19 per cent after withdrawing its earnings guidance and the major banks dropped 10-13 per cent as interest rates dived.

Macquarie dropped 12 per cent and Aristocrat dived 20 per cent.

BHP, Rio Tinto and Fortescue Metals significantly outperformed with falls of 2-4 per cent.

Investors were bracing for a renewed tumble on Wall Street, with US stock index futures trading down by their maximum allowable 5 per cent in Asian trading, despite another emergency interest rate cut and the official restart of quantitative easing by the Fed.

While intended to calm financial markets and mitigate the effects of an inevitable demand shock, the action by the Federal Reserve to take policy rates to zero and initiate a fresh program of quantitative easing wouldn’t fix the “air pocket” in economic growth caused by the extreme measures being implemented to fight coronavirus, according to Paras Anand, chief investment officer Asia Pacific at Fidelity.

“The key questions to consider are how successful this move will prove to be and what else should be in focus as investors consider long-term positioning,” he said. “Whilst the move from the Fed will help to ease the liquidity strain that is being experienced in funding markets, this will not in itself do much to counter the air pocket in economic activity as the productivity losses escalate.”

But “the most attractive buying opportunities will arise over the near term in public markets”, according to Mr Anand.

After an emergency meeting the US Federal Reserve announced a massive 1 per cent rate cut and restarted quantitative easing in early Asian trading, alongside similarly large cuts to official interest rates in New Zealand, South Korea and Hong Kong. The Reserve Bank of Australia added a net $3.1bn of liquidity to the financial system while committing to further liquidity injections “as long as conditions warrant” and planning “further policy measures” — which may include a rate cut and quantitative easing — on Thursday. The Fed slashed its fed funds rate range to the zero lower bound.