Fear is gripping markets: economists

Fear is gripping markets: economists

EOIN BLACKWELL
May 19, 2010 - 7:44PM
AAP

Fear and uncertainty, not market fundamentals, drove the Australian dollar to an eight-month low on Wednesday and pushed the domestic share market into the red, economists say.

Fears over US and German regulatory reform, the European debt crisis and the Australian government's resource rent tax saw the local dollar hit an eight-month low of 85.17 US cents on Wednesday,

Local shares fell, too, sliding 1.87 per cent to close at a nine-month low at 4,387.1 points for the All Ordinaries index.

Investor sentiment darkened further after the Westpac-Melbourne initiate consumer sentiment index showed a seven per cent slide for May, its biggest percentage drop since the height of the credit crunch in October 2008.

"It's just been one hit after the other," ICAP economist Adam Carr said of the global and domestic concerns.

He said the worries were unfounded with the economic fundamentals of nations in general, and Australia in particular, strengthening.

"The US is seeing what looks like a V-shaped recovery," he said.

"Everyone is waiting for the fall to come in China and it's not going to happen.

"When you look past all the hysteria, the Australian economy, employment, both are going at a very strong rate and interest rates are only about average."

Yet the headlines have been dominated over the past week by the uncertainty surrounding Europe.

A 750 billion euros ($A1.06 trillion) bailout package for debt-laden EU nations like Greece initially calmed markets last week.

But the mood didn't last long amid renewed speculation the crisis could spread and slow EU growth.

4Cast Financial Markets economist Michael Turner said it was hard to see how Europe could escape its debt woes without serious structural damage.

"The way people are expressing that at the moment is through the euro and the stock market," he said.

The Euro was trading at 1.2215 US cents at Wednesday's close, compared with 1.3240 US cents on May 1.

The euro is still above its long-term average of 118 US cents, Mr Turner said.

"It certainly goes a long way to show how fearful markets are with the way all this plays out."

Investor uncertainty reignited on Tuesday when Germany's securities market regulator, Bafin, banned naked short selling of certain securities - often cited as key factor leading to the 2008 financial crisis.

In the US, meanwhile, proposed reforms to the financial regulations that govern Wall Street are before the US Senate and are being fought over Democrats and Republicans.

But it's all just noise, ICAP's Adam Carr said.

"If you're pessimistic over Europe then you might as well quit your job, buy a gun, get some land and learn how to farm," he said.

"Because if you're going to be pessimistic on Europe, then you have to write off the US and write off Japan."

ANZ senior rates strategist Tony Morriss said the safe-haven bond market should to do well amidst the uncertainty and fear.

"I think on the sentiment at the moment you'd sell on any sort of rally in currency, which means that bonds should be supported."

© 2010 AAP