Rate rise tests market's nerve

CHINA's decision to raise interest rates spooked investors in the region and sparked a sell-off of resource stocks.
The benchmark S&P/ASX 200 Index dropped 41.4 points, or 0.8 per cent, to 5258.8. Sharemarkets in Tokyo and Hong Kong also took a hit, the Nikkei losing 1.2 per cent and the Hang Seng down 0.5 per cent.
The world's two biggest miners, BHP Billiton and Rio Tinto, suffered most of the damage in the Australian market after the prices of metals such as zinc, nickel and copper fell sharply on the London Metal Exchange overnight.
BHP dropped 98¢, or 3 per cent, to $29.30, closing below $30 for the first time since April 13. Rio fell $2.60, or 3 per cent, to $78.65, its first close below $80 since April 4.
Base metal miners lost even more ground. Zinifex dropped 46¢, or 4 per cent, to $10.35 and Oxiana fell 17¢ to $3.41.
The zinc price hit a record high on Wednesday, taking its rise in the past month to 34 per cent. But China's decision to raise its benchmark one-year interest rate from 5.58 per cent to 5.85 per cent — the first rise since 2004 — triggered a 7.2 per cent fall in the spot price of zinc.
The nickel price fell 5 per cent from a record high while copper dropped 1.6 per cent. Nickel miner Minara Resources fell 18¢, or 7 per cent, to $2.45 and Jubilee Mines shed 20¢, or 2 per cent, to $8.04.
Despite the steep falls, analysts said they believed the sharemarket correction would be short.
"Things have climbed up so much, it's just an excuse to take some profits," said ANZ commodities analyst Andrew Harrington.
Others said China's slight interest-rate hike was unlikely to seriously dampen the high demand for commodities.
"What's driving the pullback is concerns that growth may ease a little in China, but we're still talking about a very high base," said Daiwa Securities analyst Mark Pervan. "It would require a major correction in China to derail this bull market," he said.
He predicted the sharemarket would begin to regain ground within a few days, and therefore represented an opportunity for many investors to buy into mining stocks. "There's a lot of people looking to re-enter for the second time, or who missed the boat the first time around."
The chief analyst at Beijing Antaike Information Development, Wang Feihong, agreed the rate increase was not enough to have a big impact on fixed-asset investment in China.
"Unless we see further curbs, such as on lending in automobiles (and) real estate industries, we should not be really worrying about falling demand for metals," he told Bloomberg.
As investors dumped mining stocks, they switched to more defensive plays. Telstra rallied 6¢ to $3.94, taking its gain for the week to 15¢, or 4 per cent.
Commonwealth Bank rose 53¢, or 1.1 per cent, to $47 and West Australian Newspapers closed 40¢ higher at $8.30.
One of the week's strongest performers was embattled wheat exporter AWB. It jumped 48¢, or 12 per cent, to $4.45.