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. "
Frequently Asked Questions about this Article…
What moved the ASX200 this week and how much did it climb?
Australia's benchmark ASX200 index continued its steady rise after a recent rout, finishing the week 31.8 points (0.8%) higher at 4,172.6, as investors bought back into the market following volatile trading on global markets.
Has the Australian share market bottomed out after the recent sell‑off?
Market insiders say it's impossible to be sure the market has bottomed. AMP chief economist Shane Oliver said investors felt Australia had been oversold and were re‑entering, but he warned that sharemarket bottoms typically form over months and there will likely be more tests ahead.
Why do economists warn the break from volatility might be short‑lived?
Economists point to ongoing risks that could reignite market swings: fears about the health of Europe's banks, instability in funding markets, and unresolved government‑debt problems in the US and Europe. Fund managers also say volatility will persist until US leaders agree on a firm plan to control mounting debt.
Are interest rate cuts expected and what did the article say about the Reserve Bank outlook?
Investors were tipping the Reserve Bank to cut interest rates to around 3.57% by December, after the RBA had recently held rates at 4.75%. AMP's Shane Oliver noted the RBA has scope to cut rates and the government could provide fiscal stimulus if needed, which helps Australia's resilience.
How has the Australian dollar move affected investor interest in local shares?
The Australian dollar slipped slightly to about US102.80c (down roughly 8 cents from a recent high), and CommSec chief economist Craig James said a weaker Aussie dollar made Australian shares more appealing to foreign investors, who were quick to pick up beaten‑down stocks.
Which stocks did foreign investors target after the market rout?
According to the article, foreign investors swooped on battered big resources stocks such as BHP and Rio Tinto, attracted by cheaper local share prices and a weaker Australian dollar.
How are political and fiscal debates in Australia affecting markets?
The article says Prime Minister Julia Gillard faced pressure over the government softening its commitment to returning to a budget surplus next financial year. Opposition Leader Tony Abbott urged the government to control spending and honour its surplus promise—political uncertainty around fiscal plans can weigh on investor sentiment.
What should everyday investors take away from the recent market moves and commentary?
The key takeaways in the article are: Australian shares have rebounded but risks remain, so volatility could return; Australia is viewed as relatively better placed to weather shocks because of RBA scope to cut rates and potential fiscal support; foreign demand can lift beaten stocks; and investors should expect that market bottoms can take months to form, so patience and awareness of ongoing global risks are important.
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