Offshore selling pummelled the Australian share market for a fifth consecutive day Thursday as the Australian dollar plunged on concerns about European debt, China's economic outlook and the proposed resource super profits tax. Geopolitical tensions fuelled selling, after a team of international investigators concluded that a North Korean torpedo sank a South Korean warship on March 26.
The benchmark S&P/ASX 200 index closed down 70.6 points, or 1.6%, at a ninemonth low of 4316.5 in volatile trading.
Share trading volume jumped to A$8.4 billion, compared to A$7 billion on Wednesday and a daily average of just over A$6 billion last month. On the charts, the Australian share market is suffering from a broadening top pattern, which is likely to test Fibonacci retracement support levels at 4297.0 in the near term and 4072.0 in the longer term, according to Dow Jones Newswires technical analysis.
But after a brief foray into positive territory, the S&P/ASX 200 and the Australian dollar reacted negatively to the report about North Korea and its warning of "fullscale war" if new sanctions are imposed.
Traders said investors didn't seriously believe a war on the Korean peninsula was likely. However, the tensions there did trigger more of the offshore selling that intensified recently as the European crisis escalated and the Australian government proposed a new resources tax.
"We are still seeing offshore selling," said a senior institutional trader at major broker. "Clearly the banks are still the focus and at the moment it's really a currency play."
The four major banks accounted for 37% of the fall in the index, with Westpac down 3.9% to A$21.80, ANZ down 2.9% to A$20.63, Commonwealth Bank of Australia down 2.5% to A$50.07 and National Australia Bank down 2.3% to A$23.25.
Resources also came under pressure, with BHP Billiton down 0.6% to A$36.75, Rio Tinto down 1.0% to A$62.25 and Newcrest down 2.8% to A$31.68. Industrials suffered from U.S. peer falls, with Qantas down 3.6% to A$2.40 and Brambles down 2.0% to A$6.84.
Among energy stocks, Woodside fell 1.6% to A$41.59 and Santos fell 5.1% to A$11.80. Smaller miners were hammered, with Whitehaven Coal down 9.9% to A$4.36, Macarthur Coal down 7.8% to A$10.12 and Fortescue Metals down 7.8% to A$3.57. Mining and drilling services companies were also weaker, with Macmahon Holdings down 7 cents at 51 cents and Boart Longyear down 7.1% to A$2.77.
In the retail space, Pacific Brands fell 10 cents to 91 cents. Head of sales at one broker said the market was suffering from a "perfect storm" of risk aversion caused by the European crisis, as well as concern about China and political uncertainty in Australia, particularly in regard to the proposed resources tax.
Other traders agreed there could be a short-term buying opportunity near 4300.0. The Australian share market was 14% below its April peak, whereas on a currency-adjusted basis, it was underperforming most global markets with a 24% fall since April 15.
Other traders said the market could bottom once analysts had pared back their ambitious earnings forecasts for 2011, by which time much of the offshore selling may be complete.