Australian stocks recovered from a steep intraday fall to close only marginally lower yesterday, as the Reserve Bank cut interest rates to a record low.
The benchmark S&P/ASX 200 closed down 12.5 points, or 0.2 per cent, at 5143.7, after trading down 0.7 per cent earlier in the session.
Some traders welcomed the RBA's additional stimulus to the economy, but others worried that the seventh rate cut in 18 months suggested the economy was in poor shape.
"A lot of the economy has been crying out for a rate cut," said Toby Grimm, an analyst at Baker Young Stockbrokers in Perth, who noted that local interest rates were high by European and US standards.
"It shouldn't be seen as a cause for alarm. It's just the Australian central bank responding to what has become normal in global terms, while repositioning the Australian economy as the mining boom peaks."
The central bank is hoping that lower rates will help spur activity in weaker sectors of the economy, such as construction and retail spending.
Policymakers are worried, though, that despite several rate cuts the dollar remains strong, weighing on tourism, manufacturing and earnings from the country's crucial resources exports.
Mining companies helped steady the market, recovering some of their recent sharp losses. BHP Billiton added 2.4 per cent and Rio Tinto rose 2.2 per cent. The London Metals Exchange, which provides a price lead for mining companies, was closed early yesterday for a holiday.
Banking stocks, which have been outperforming this year because of their healthy dividends, all closed lower. Commonwealth Bank fell 1.9 per cent, while ANZ Bank declined 1 per cent.
Building materials companies came under pressure after a non-government survey showed that conditions for construction firms slumped to the lowest point in seven months in April.
The weak survey came a day after building firm Boral downgraded its annual profit guidance. Boral fell another 1.8 per cent yesterday as analysts downgraded their view on the stock.
A profit downgrade by Coca-Cola Amatil sent the company's shares down 11 per cent. Another beverage maker, Treasury Wine Estates, initially fell about 2 per cent, but recovered after the rate cut to end the session down 0.2 per cent.
Retailers Woolworths and Wesfarmers, which owns the Coles supermarket chain, fell 2.1 per cent and 1.4 per cent, respectively, while food company Goodman Fielder shed 3.4 per cent.
The dollar hit two-month lows in Asian trading yesterday following the RBA's surprise rate cut.
In the statement accompanying its decision, the RBA described the dollar's strength as "unusual" given falls in export prices for bulk commodities such as coal and interest rates over the past 18 months.
The dollar remains above parity against the greenback and is at historical highs against the yen and euro too.
Currency traders immediately sold the dollar after the RBA's move. It fell to a low of $US1.018, from $US1.023, before recovering slightly to $US1.019 at 5pm AEST
"Parity is a possibility," said Andrew Salter, a currency strategist at ANZ Bank.
"But it's hard to make the case for a materially lower Australian dollar given what's happening with liquidity conditions around the world."
