Elsewhere, the reaction was more muted. The direction of the stock market largely depends on two factors - how successful Japan proves with its artificial resuscitation efforts to stimulate consumer spending, and whether the Australian dollar can scramble over US$0.60 long enough to encourage the Reserve Bank of Australia to cut interest rates.
The All Ordinaries index has fallen 14% from its all-time high of 2881.44 in mid April, slicing A$60 billion (about US$36.8 billion) off market values. That has tested the nerves in 25% of households that have become investors recently through the floats of Telstra, insurance giant AMP, and gambling chip TAB, as well as several banks.
Shares of the big mining companies dragged the broad market down, dropping more than 20 cents in the dollar dogged by falling metal prices and fears of global deflation.
Sentiment could turn on a dime, however, because the underlying economy of Australia is the strongest in the region and equities have been outperforming sliding Wall Street in recent weeks. Many stocks look cheap to overseas buyers.
Don Argus, head of the National Australia Bank (NAB), told the Securities Institute of Australia recently the weak local dollar had turned the country into a 'supermarket' for foreign takeovers. Argus, who will become chairman of troubled industrial and mining group BHP next year, said: 'We are simply a giant corporate warehouse with the Australian dollar where it is now.'
Ironically, Argus may be among the first to launch a hostile bid. Federal Treasurer Peter Costello has clung to his 'four pillars' embargo on takeovers among the major banks. But the NAB boss is keen to force the issue. He is tipped to make a pre-emptive strike on ANZ, whose share price has been damaged by losses in Russian and other submerging markets' paper. If that comes to pass, expect merger talks between Commonwealth Bank and Westpac, which could eventually mean the big four turning into the big two. Do not rule out a bid from one or more of the wounded US and European banks that now badly need stable profits.
The shares of all the leading banks look like providing good value with their reliable earnings streams and high dividend payments. In fact many Australian blue chip shares offer yields of well over 5% - tax free to people in lower earnings brackets - which is one reason why small holders have not been panicked by recent volatility. The returns on 10-year Australian bonds have skidded to record lows of 4.8%, and bank deposits scarcely wash their own faces, even with inflation below 2%. Many big institutions are very liquid and pension fund money continues to flow into equities.
The projected Howard tax reform package is good for the mining companies. Stockbrokers Prudential Bache calculate costs for the resource sector will decline 4.4%, helped by cuts in fuel tax, and a zero rating for GST. The shares of companies like Western Mining, BHP and Woodside are all moving up from chronically oversold positions. The recent fillip for the gold price has brought sharp gains for leading gold miners like Normandy and Sons of Gwalia. In the industrial sector, overseas dollar earners like Qantas, Fosters, Pacific Dunlop and big wine exporter Southcorp have attractions. The food and retail sector offers relative safety and good returns from the likes of Goodman Fielder, National Foods, Woolworths and Coles Myer.
If Don Argus is right in declaring 1999 the year of foreign takeovers, overseas predators may have to put their skates on if they want to cash in on a cheap Australian dollar. Economists at both Commonwealth Bank and Westpac say the currency is now undervalued. The CBA believes US$0.67 is fair value for the dollar, and the bank estimates that commodity prices would have to drop another 20% to justify the current level of US$0.60 cents.