ASX Slides to Two Year Low

In response to negative economic data from China and a decline of commodity prices on Monday and Tuesday, the Australian ASX 200 index experienced a 2.07% drop on Wednesday. This represents a two year low for the index at a close of just under 5000, traditionally thought of as a key support point on the ASX. The Wednesday selloff negated a gain of 0.74% on Tuesday which followed a lesser drop on Monday. This drop, combined with a similar fall on the All Ordinaries index, accounted for a loss of nearly $30 billion in equity.

The sharp decline of Australian stocks followed a report of weak industrial manufacturing data in China, now at a six year low. As China’s economy has continued to slow, prices of commodities commonly sold into its markets have dropped substantially. Iron, copper and crude oil, all among Australia’s top ten exports, have been particularly hard hit. As a result, shares of Australian mining companies experienced the largest losses in Wednesday’s selloff, with some losing as much as 4% of their total share value.

The decline was not, however, limited to mining and industrial companies. Banks were also affected by the drop in share prices, with Westpac, one of Australia’s four major financial service providers, falling by 3.7% to close at $29.97. Retailers, service providers, and energy sector companies also experienced substantial drops in share price, with only a handful of companies rising in value. Transportation stocks fared somewhat better, as a decrease in oil prices is a positive economic indicator for companies which have fuel as a primary business expense.

The decline in share prices was also accompanied by a drop in the value of the Australian dollar, which dropped to a daily low of $.7019 against the US dollar before recovering some ground to reach $.7033. While these numbers may seem like insignificant fluctuations, they are relatively large within the context of the foreign exchange market. The AUD had already dropped below $.71 USD for the first time in over a week before the close of Australian markets on Tuesday.

Despite the weak manufacturing date from China, commodities prices had experience a slight recovery by the opening of US trading on Wednesday morning, with oil and copper both up over their closing points from Tuesday. While this may represent the start of a market correction, it is likely that the drop in oil prices from Tuesday will keep Australia’s stock market in a bearish mood going into Thursday. US oil stockpiles are, however, reportedly being diminished for the first time in many months, indicating that oil prices may find their way back up in the near future. Such a price recovery could be good news for the Australian economy after its recent decline.