MELBOURNE: Australian shares closed down 1.2 percent on Thursday, reversing half of Wednesday's rally on worries about Europe's lingering debt crisis and poor Christmas sales for local retailers, even after two interest rate cuts.
Dealers and analysts said they expected the market to remain under pressure over the next few weeks, with attention focused squarely on Europe as there would be little economic data over the Christmas and New Year holidays.
"The volatility's here to stay," said Savanth Sebastian, equities economist at Commonwealth Securities.
"The big unknown now is what the banks in Europe are going to with all the cash they've just accumulated," he said, adding that markets would be comforted if the banks started buying up sovereign debt in the weakest European countries.
In Australia, retailers raised more alarm bells.
New Zealand-based outdoor gear retailer Kathmandu Holdings Ltd was the latest to warn that Christmas sales had been disappointing and first-half earnings were likely to fall. Its shares plunged 25 percent to a one-year low.
Its red flag followed confessions over the past week from JB Hi-Fi and surfwear retailer Billabong, which lost half its value this week.
"Despite the two rate cuts, that slump in confidence in December really paints a picture of a consumer that's battening down the hatches," Sebastian said.
Investors, analysts and dealers said the problem for retailers was not going to go away anytime soon, with Australian shoppers saving more and using their strong currency to hunt for deals offshore on the internet.
"That's not going to fundamentally change in the short term and will require some fairly decisive management decisions in the new year," said Jamie Spiteri, senior dealer at Shaw Stockbroking.
Analysts suggested retailers would need to slow down store rollouts, close shops and cut jobs.
Investors dumped most retailers, knocking department store chain Myer down 6.2 percent, JB Hi-Fi down 3.8 percent and David Jones down 3.5 percent.
The early warnings from retailers hit shopping centre landlords, too, with CFS Retail sliding 5.2 percent and Stockland Group 4.4 percent.
The environment is only going to get tougher for retail property trusts, which have always relied on modest increases in rental revenue.
"That's got a degree of vulnerability going forward," Spiteri said.
The benchmark S&P/ASX 200 index gave up 48.7 points to close at 4,090.8. The benchmark rose 2.1 percent on Wednesday.
New Zealand's benchmark NZX 50 index fell 0.5 percent, closing at 3,207.2.
Top miners BHP Billiton and Rio Tinto both fell more than 1 percent, while the big four banks ended flat to down 1.4 percent.
Battered OneSteel was the day's top gainer, up 10 percent, after saying it sees no reason to raise further debt or equity and sees nothing that would threaten its loan covenants, following the sale of its piping systems business and some property investments for about A$100 million.
Rival BlueScope Steel, which spooked investors last month with an unexpected A$600 million share sale, rose 1.3 percent.
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