Australian stocks fell, led by Macquarie Bank Ltd., after the New York Times reported Merrill Lynch & Co. will probably add about $2.5 billion more in writedowns in the wake of the U.S. subprime mortgage crisis.

“Everyone has been reminded of what the credit crunch can do to you,” said Adnan Kucukalic, a Sydney-based strategist at Credit Suisse Group. “The credit crisis isn’t over. People are realizing that there may be more to come, not just from Merrill Lynch, but from others as the year goes on.”

Commonwealth Bank of Australia led a decline by banks after a report showed core inflation accelerated more than estimated in the third quarter, raising the chances of an interest-rate increase next month.

The S&P/ASX 200 Index lost 26.5, or 0.4 percent, to 6,634.4 as at the close in Sydney, reversing an earlier gain of 1.1 percent. About 10 stocks dropped for every seven that climbed.

Macquarie, Australia’s largest investment bank, lost A$1.85, or 2.3 percent, to A$79.88. The slump in U.S. subprime mortgages contributed to the value of a fund sliding 27 percent in July, Macquarie said on Sept. 1. Babcock & Brown Ltd., the country’s No. 2 investment bank, fell 29 cents, or 1.1 percent, to A$26.89.

James Hardie Industries NV, the biggest seller of home siding in the U.S., slid 14 cents, or 2 percent, to A$6.95.

Merrill Lynch will today probably add about $2.5 billion more in writedowns for third-quarter earnings to the $5 billion it disclosed earlier this month, the New York Times reported, citing a person briefed on the situation.

Subprime Fallout

The investment bank said Oct. 5 that it will post the first quarterly loss in six years after cutting the value of mortgages, asset-backed securities and loans for leveraged buyouts by about $5 billion.

Jessica Oppenheim, a Merrill spokeswoman, declined to comment after business hours on the additional writedowns.

Index futures on the U.S. benchmark Standard & Poor’s 500 Index were recently 0.5 percent lower.

Separately, Australia’s core inflation rate jumped the most in 16 years in the third quarter, fueling expectations the central bank will raise interest rates next month.

Commonwealth Bank of Australia, the second-biggest bank in Australia, fell 36 cents, or 0.6 percent, to A$58.65. National Australia Bank Ltd., the nation’s largest lender, slipped 10 cents, or 0.2 percent, to A$41.15. Australia and New Zealand Banking Group Ltd., the third-largest, dropped 10 cents, or 0.3 percent, to A$31.11.

Higher Rates?

The central bank’s weighted-median inflation measure, which excludes the largest price gains and declines, climbed 1 percent from the second quarter, the biggest increase since 1991, the statistics bureau said. That beat the 0.8 percent median estimate in a Bloomberg News survey of economists. The gauge advanced 3.1 percent from a year earlier.

Governor Glenn Stevens will increase the overnight cash rate target to 6.75 percent on Nov. 7, according to 26 of 27 economists surveyed by Bloomberg News. Higher interest rates curb demand for loans and reduce the value of banks’ bond holdings.

The S&P/ASX 200′s futures contract for December dropped 0.1 percent to 6,676. The broader All Ordinaries Index fell 0.4 percent to 6,652.10.

The following shares also gained or declined. Stock symbols are in brackets.

Anvil Mining Ltd. (AVM AU), a Perth-based mining company, gained 90 cents, or 4.3 percent, to A$21.90. Anvil said its Kinsevere copper mine in the Democratic Republic of the Congo produced 6,622 metric tons of copper from June 9 to Sept. 30. It also said the company has commissioned a heavy media separation plant on the site with capacity to process 500,000 tons of ore per year.

Emperor Mines Ltd. (EMP AU), an Australia-based miner, lost 0.3 cent, or 4.1 percent, to 7 cents. South Africa’s DRDGold Ltd. sold its 78.7 percent stake in Emperor for A$56 million ($50 million) to focus on its South African operations after losses widened, it said yesterday.

Transfield Services Ltd. (TSE AU), an Australian provider of maintenance services to miners and utilities, added 46 cents, or 3.1 percent, to A$15.20. Transfield said it expects earnings growth to continue as it continues to seek acquisitions. It said services work-in-hand had reached A$9.1 billion, according to a statement to the exchange.

Woolworths Ltd. (WOW AU), Australia’s largest retailer, fell 33 cents, or 1 percent, to A$32.41. The company said it won’t proceed with an antitrust application to buy assets from smaller rival Coles Group Ltd. after the nation’s regulator blocked it from acquiring the Kmart unit.

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By Malcolm Scott
Bloomberg

http://www.bloomberg.com/apps/news?pid=20601081&sid=aYzkXAYvvhPw&refer=australia