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The Reserve Bank of Australia (RBA) pumped extra cash into the money market yesterday and prepared to lend more US dollars as risk aversion reached new extremes following the shock rejection of a US bailout plan.
Australian Prime Minister Kevin Rudd urged US lawmakers to urgently return to
negotiations to come up with a deal that would prevent further infection of world markets.
Such was the turmoil that investors were increasingly betting the central bank would also have to cut official rates as soon as next week, and by an aggressive 50 basis points.
With major banks around the world too scared to lend to each other, the RBA sought to ease some of the strain at home by adding A$1.95 billion ($2.32 billion) in repurchase agreements, above the estimated daily need of A$1.87 billion.
The addition should further expand banks' cash cushion with the RBA, which was already at a record A$10.65 billion on Monday.
The Federal Reserve had led another round of liquidity measures, more than doubling US dollar swap limits with major central banks to US$620 billion ($915.5 billion).
The RBA's own swap limit with the Fed was trebled to US$30 billion. An RBA spokesman said it would likely hold a US dollar auction at the end of this week with a lending term around 90 days to help meet banks' cash requirements for year-end.
The Australian stock market closed down 4.3 per cent yesterday, losing about A$55 billion in value, as investors fled most sectors.
But the decline was not as bad as expected, with the major indices recovering some early losses after the Federal Government reassured Australians the nation could weather the financial storm in the US.
The benchmark S&P/ASX-200 closed 206.9 points, or 4.3 per cent, lower at 4600.5, while the broader All Ordinaries fell 207.9 points, or 4.3 per cent, to 4631.3.
It is the biggest one-day fall since January 22 this year, when the S&P/ASX200 index lost 7.05 per cent and the All Ordinaries fell 7.26 per cent.
The Australian market had fallen about 5.5 per cent in morning trade, carving A$65 billion off its value.
CommSec chief equities economist Craig James said the Australian market, as with others in Asia, had held up pretty well.
"We're seeing some big declines in our banks but nowhere near that seen for financial stocks around the world," James said.
All of the major banks closed weaker. Westpac was down 7.21 per cent, or A$1.67, to A$21.48, its takeover target St George Bank nosedived A$2.10, or 6.84 per cent, to A$28.60, National Australia Bank shed A$1.43, or 5.57 per cent, to A$24.26 and ANZ was relatively unscathed, down A4c to A$18.75.
The nation's largest lender, Commonwealth Bank, was down A$1.25, or 2.85 per cent, at A$42.62.
Mining giant BHP Billiton dropped A$3.24, or 9.46 per cent, to A$31.00, while its takeover target Rio Tinto had lost A$11.00, or 11.52 per cent, to A$84.50.
Woodside Petroleum fell A$3.55, or 6.51 per cent, to A$51.00, Santos was off 60 cents, or 3.05 per cent, to $19.10 and Oil Search had given up 13 cents, or 2.27 per cent, to A$5.60.
As for media stocks, Fairfax had shed 8c, or 2.94 per cent, to A$2.64, Consolidated Media had dropped 6c, or 2.38 per cent, to A$2.46, News Corp gave up 73c, or 4.55 per cent, to A$15.30 and its non-voting scrip was down A$1.02, or 6.49 per cent, to A$14.70.
Among retailers, Woolworths lost A$1.17, or 4.12 per cent.
- BLOOMBERG