Citigroup disaster triggers market dive

Australian markets have tumbled by more than 140 points today in the wake of big overnight falls on US markets, shaken by the announcement of massive losses by US banking giant Citigroup.

At midday the S&P/ASX200 is down 2.5% on yesterday’s close to 5811.6, after a hectic morning that saw the index drop over 100 points, then lift 150 points, then drop by around 100 points again in the first 30 minutes of trading.

Shares that have lost the most value today include Centro Properties Group, down 10.83% to 53 cents, Allco Finance Group, down 6.39% to $4.68, Qantas, down 5.71% to $4.62 and Challenger Financial Services, down 5.35% to $4.24.

The Australian dollar has also fallen lower to US88.30c at 12pm, down from yesterday’s local close of US89.95c, on the perception of heightened risk in the US economy.

Although analysts expected Citigroup to record a poor fourth quarter 2007 result, the magnitude of the $US9.8 billion in losses – the biggest in its 196 year history – announced by the bank caught markets by surprise.

The bad news pushed the benchmark Dow Jones Index lower 2.17% to 12501.11.

The key reason for the loss was a US$18.1 billion write-down in the value of the bank’s sub-prime mortgage assets. The write-down is the biggest by a bank so far, exceeding even the $US14 billion write-down by investment bank UBS late last year.

Citigroup announced that it would receive $US14.5 billion in new funds from external investors and, reportedly, shed as many as 20,000 jobs in its global operations in order to improve its position.

Another US bank with significant exposure to the crumbling sub-prime market, the Bank of America, also revealed plans to sell its brokerage division and cut 650 jobs from its investment banking operations.

And in Britain, speculation is growing that the Government there will have no choice but to nationalise the troubled Northern Rock Bank. The British Government pumped millions into the bank after it endured a run on deposits and subsequent crash in its share price following revelations of its exposure to the US sub-prime crisis.

Soft retail sales figures from the US department of commerce released yesterday also contributed to the negative market sentiment. Retail sales in the US dropped 0.4%, well below market expectations of only a slight 0.1% contraction or possibly some modest growth.

A slew of crucial economic data, including the December CPI, new housing starts, industrial production and the US Federal Reserve’s Beige Book, to be released in the US tonight, will determine whether there will be further market falls.