Shares drop as RBA keeps rates on hold

Shares suffered their biggest fall in nearly a month as the Reserve Bank of Australia elected to hold the official cash rate at its record low 2.5 per cent for a tenth month, as was widely expected.

The benchmark S&P/ASX 200 Index and the broader All Ordinaries Index each lost 0.7 per cent on Tuesday to 5479.7 and 5460.5, respectively. Following the rates announcement the market was pricing the chances of a rate hike in the next 12 months at 20 per cent, compared to a zero chance a day earlier.

Local shares started to tumble minutes after trading began having taken a soft lead from offshore. Shares on Wall Street and around Europe were broadly flat on Monday night, while London’s FTSE added a modest 0.3 per cent, amid expectations the European Central Bank will act to increase stimulus when it meets on Thursday.

The ASX continued to decline in the afternoon despite Asian sharemarkets providing more support. Hong Kong’s Hang Seng and Japan’s Nikkei were each trading about 0.7 per cent higher when the Australian market closed.

“We are likely to see a cap on the local market around current levels until a catalyst for company earnings comes along,” Morgans stockbroker Stephen Pill said.

“A major theme at the moment is the reaction to last month’s federal budget, with consumer confidence slumping and a number of cyclical stocks, such as ALS Ltd, issuing profit warnings.”

In an accompanying statement to the rates decision, RBA board members upgraded their global growth outlook while welcoming slower house price growth domestically. The RBA also noted the dollar remains high by historical standards, “particularly given a decline in commodity prices”.

In another departure from previous statements the RBA noted that, “volatility in many financial prices is currently unusually low”.

In other local economic news, Australian Bureau of Statistics data showed the current account deficit almost halved in the March quarter, boosted by record shipments of iron ore and coal.

In China, new data indicated the economy improved in May. China’s official non-manufacturing sector purchasing managers index showed rose to 55.5 in May from 54.8 in April, while the final reading of the HSBC/Markit manufacturing PMI for May rose to 49.4, lower than a preliminary reading of 49.7 but up from 48.1 in April.

Resources giant BHP Billiton lost 0.5 per cent to $36.40 after the company announced plans to slash 500 jobs in New South Wales’ Illawarra region as the company scales back coal mining operations amid a weak commodity price, while the head of its US shale gas operations said cost controls are working.

Main rival Rio Tinto gained 0.7 per cent to $59.65 as the spot price for iron ore, landed in China, edged up 0.3 per cent to $US92.10 a tonne.

Late on Tuesday, June 20 was set as the new meeting date for Westfield Retail Trust shareholders to vote on a controversial restructure with the larger affiliated Westfield Retail Group. Shares in both stocks declined.

Commonwealth Bank of Australia and Westpac Banking Corporation each lost 0.4 per cent to $81.90 and $34.45 respectively, while ANZ Banking Group was unchanged at $33.71. National Australia Bank fell 0.7 per cent to $33.64 as it apologised for a glitch and launched a zero interest credit card promotion in a bid to win new customers.

Retail was the was the worst-performing sector, down 1.6 per cent as an ABS report showed retail sales grew 0.2 per cent in April, missing expectations for a 0.3 per cent increase. Woolworths lost 1.1 per cent to $37.55, while Wesfarmers, owner of Coles, shed 1.3 per cent to $42.98.

Telstra Corporation fell 0.6 per cent to $5.36. Credit Suisse analyst Fraser McLeish

cut his recommendation from “outperform” to “neutral” noting the company’s mobile growth is at risk from price moves by main rival Optus. SingTel-Optus fell 1.2 per cent to $3.31 as it announced plans to boost its 4G coverage and spend more on advertising.

AGL Energy added 0.5 per cent to $15.48 following the release of a report from Australia’s chief scientist that paves the way to the end of moratoriums on fracking in many states, with “strict controls”.

Credit agency Veda Group was the worst-performing stock in the ASX 200, down 5.7 per cent to $2.15.

Rare earths miner Lynas was the best-performing stock in the ASX 200, jumping 9.7 per cent to 17¢.

Building materials supplier CSR, owner of Gyprock, fell 4¢ to $3.34 as it traded without the rights to a 5¢ per share final dividend.

Standards publisher SAI Global lost 1.7 per cent to $5.11 amid speculation Pacific Equity Partners may pull its $1 billion takeover bid after the company said it would open its online data room to other bidders.

Local shares started to tumble minutes after trading began having taken a soft lead from offshore.

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