Rebound staves off the GFC Mark II

Rebound staves off the GFC Mark II

TIM COLEBATCH AND RICHARD WILLINGHAM
May 22, 2010

THE biggest fall on global financial markets since the panic of 2008 halted suddenly in Australia yesterday, raising hopes that markets might avoid a second catastrophic meltdown.

After a month of almost unbroken falls - more like free-fall over the past week - share prices and the Australian dollar rebounded strongly during yesterday's trading after opening sharply lower.

In a roller-coaster day on the markets, the dollar fell, rose and fell again. Its journey took it from US80.73¢ in early trading to US83.65¢, then back to US82.69¢ by the evening.

On the stockmarket, the benchmark S&P/ASX200 index began 2.5 per cent down after Wall Street overnight suffered its biggest fall for more than a year, widely attributed to fears of a slump in Europe and a slowdown in China. But, unexpectedly, it began creeping back up, then the creep became a bound, and it ended up just 0.25 per cent lower at 4305.4.

But even after yesterday's bounce, it was a week that took us back to the panic of October 2008. Stock prices fell 6.6 per cent, wiping $90 billion off the market's value. The dollar plunged 7.3 per cent against the US dollar, and only slightly less on the Reserve Bank's broader index.

Analysts said the Aussie could drop below US80¢ next week if the market retreat continued but its long-term prospects were positive.

''We still think it can head lower from here,'' said Westpac currency strategist Jonathan Cavenagh. ''We think it can head into the 70s.''

Yesterday's rally was fuelled by a market rumour that the Reserve Bank was buying the currency. But the Reserve refused to confirm or deny this, and some suggested it was a correction after the rapid sell-off of recent days. But as analysts tried to make sense of it all, opinions differed not only on where the market will go next, but on what is driving the global retreat of investors away from stocks and risk and into the safety of bonds and the US dollar.

Trillions of dollars have been pulled out of stock markets the world over. Wall Street's benchmark index, the S&P500, fell 7.4 per cent in the past week. In Britain, the FTSE index was down 6.6 per cent, the same as Australia's, while Japan's Nikkei index fell 4.1 per cent.

Shadow treasurer Joe Hockey yesterday blamed the plunge partly on the government's proposed resource rent tax on mining. But Prime Minister Kevin Rudd emphasised the global falls, attributing them to ''a genuine crisis of confidence in Europe''.


In their gloom, the markets have ignored very strong growth figures and forecasts from Asia and the US. China's 12 per cent growth in the year to March has now been topped by Singapore (15.5 per cent) and Taiwan (13.3 per cent). In the US, the Fed is forecasting growth this year to be in the range of 3.2 to 3.7 per cent.

The 11 per cent plunge in the Australian dollar from its peak of US93.41¢ in mid-April will be good for the slow lane of our two-speed economy. For local manufacturers, tourism operators and farmers, it makes exporting more viable and profitable.

But imports will become more expensive, at least for the middlemen, and anyone travelling overseas will need more money.

The proposed resources tax appears to have been at most a marginal influence. The plunge in Australian stock prices over the past month has been similar to the fall in stock prices in the US.

Source: The Age

http://www.smh.com.au/business/rebound-staves-off-the-gfc-mark-ii-20100521-w231.html