Shares plunge more than 4% as global panic spreads to Europe: Economy roundup

This morning the benchmark S&P/ASX200 index has slumped a massive 4.2% in early trade, dropping 194.9 points to 4423.8 points at 11:45am AEST, after posting a 78.3 points gain on Tuesday following the interest rate rise.

That thud you heard this morning was the sound of the Australian market crashing back to reality after yesterday’s 1% rate cut by the Reserve Bank sparked a mini-rally on the sharemarket yesterday afternoon.

Despite some celebratory headlines this morning (“Jump for joy” screamed the Herald-Sun, while The Australian led with “RBA leads the world”) it seems that investors have finally realised that a 1% rate cut isn’t very good news at all – it’s a clear sign that the RBA believes we are heading for a recession, or something very close.

This morning the benchmark S&P/ASX200 index has slumped a massive 4.2% in early trade, dropping 194.9 points to 4423.8 points at 11:45am AEST, after posting a 78.3 points gain on Tuesday following the interest rate rise.

While the sell-off has been wide-spread – at one stage this morning only eight stocks were in positive territory – financial stocks have been hit hardest, with National Australia Bank slumping 5.8%, ANZ losing 4.8% and Westpac dropping 3.7%. Commonwealth Bank remains in a trading halt after buying BankWest this morning for $2.1 billion.

Australian investors got another disastrous lead from Wall Street last night, with the Dow Jones Industrial Average tumbling for the fifth day in a row.

The index fell 508.39 points, or 5.11% last night, taking its losses for the last five days to 13%.

The savage sell off was sparked by Bank of America Corp, which announced it would sell $US10 billion in new stock in a bid to raise capital and shore up its balance sheet. The idea that other banks may need to follow suit spooked the skittish market.

The fallout from the financial crisis in Europe also gets uglier by the day.

The British Government is preparing to a rescue package for its banking system, which is likely to include public money being injected into the banks.

Russia earlier unveiled an aid package for its banks and negotiated an emergency bailout for Iceland, which is facing the threat of “national bankruptcy”. The Icelandic Government took over its second-largest bank and propped up its battered kronur today.

As Alan Kohler writes today, the situation in Europe could quickly overtake the US crisis as the greatest threat to global economic stability.