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After all that ... it's up again

AUSTRALIAN shares have continued their steady rise from their worst rout in two years, stepping off the rollercoaster that has rattled global markets.

AUSTRALIAN shares have continued their steady rise from their worst rout in two years, stepping off the rollercoaster that has rattled global markets.

But stockmarket economists warn that the break from the volatility fuelled by fears about the health of Europe's banks, the stability of funding markets and the US and Europe's government debt problems might be shortlived.

After a dizzying week on Wall Street, where investors aggressively bought and sold stocks pulling the market down and up as much as 5 per cent Australia's benchmark ASX200 index stayed on course to finish the week 31.8 points, or 0.8 per cent, higher at 4172.6.

Market insiders yesterday said it was impossible to say if it had bottomed out.

"Investor sentiment has spun on a dime since Tuesday morning," said AMP chief economist Shane Oliver.

"Investors thought Australia was oversold and it's time to get back in because it's looking relatively better here than it does globally."

Dr Oliver said Australia was better placed than most developed countries to weather another financial storm, with the Reserve Bank having scope to cut interest rates and the government in a position to provide fiscal stimulus.

Investors are now tipping the Reserve to cut interest rates to 3.57 per cent by December. Last week, the Reserve decided to hold rates at 4.75 per cent.

But Dr Oliver said Australia's relative economic fitness did not mean it had escaped an aggressive bear market.

"I'm hopeful we've seen the bottom of shares, but I also know that sharemarket bottoms form over months and there will be more tests along the way."

Prime Minister Julia Gillard yesterday continued to face pressure over the government this week softening its commitment on returning to surplus next financial year.

She again said the instability abroad made the challenge more difficult but the government expected to achieve this "objective".

Asked whether he would support the government running a deficit for longer to improve Australia's economic recovery, Opposition Leader Tony Abbott said the government should get its spending under control.

He said he supported "governments that tell the truth and this government has been saying for months now that it would achieve a surplus. Well, it should honour that promise."

The Australian dollar yesterday fell slightly to US102.80?. In the past fortnight it has shed almost US8? from a record high of almost US110.13?.

CommSec chief economist Craig James said a weaker Australian dollar had made Australian shares more appealing to foreign investors. He said they were quick to swoop on battered shares such as BHP and Rio Tinto.

Tom Elliott, the chief investment officer at Melbourne fund manager Beulah Capital, said that until US leaders agreed on a firm plan to control the country's ballooning debt, market volatility would continue.

"They have decided that rather than get off debt, they just need a bit more debt," Mr Elliott said. "It's like someone who is a heroin addict. Rather than go cold turkey, they are taking a bit more heroin to avoid the initial pain. "

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