ECB move fizzes

THE Australian sharemarket failed to respond to the European Central Bank's "big bazooka" plan to save the eurozone from break-up, amid fresh concerns over China's economy and falls in the price of iron ore.

By InvestSMART · 8 Sep 2012

By InvestSMART ·
8 Sep 2012

Comments

While European and US markets leapt as much as 3 per cent after the ECB announced a new program to buy the bonds of troubled eurozone countries, Australia's share market barely rose as post-boom fears dominated.

The dollar jumped by nearly one US cent, hitting companies that earn a large portion of their profits in foreign currency.

"Ultimately the ECB plan must be good news for Australia as well, but for now people seem more fixated on the idea of a post-commodity boom economy, and what that's going to look like in the future," National Australia Bank's head of research, Peter Jolly, said.

"It tells you it hasn't simply been European issues depressing growth prospects, it's a unique thing to do with Australia and commodity prices and the Asian slowdown."

The ECB announced a new bond purchase program for debt-ridden European countries in a bid to fix Europe's banking crisis and prevent a break-up of the monetary union.

Federal Treasurer Wayne Swan said it was a "positive step towards putting Europe back on a sustainable footing".

The definitive steps saw Frankfurt up 2.9 per cent, Paris up 3.1 per cent, and London up 2.1 per cent, while in the US the S&P500 rose 2 per cent and the Dow Jones was up 1.9 per cent.

Local investors were less enthused, failing to exploit the rallies on markets throughout Asia, where Shanghai was up 4.2 per cent, Hong Kong rose 2.4 per cent, and Japan was up 2 per cent.

But in a sign that local investors still welcomed the news from Europe, analysts said there was a small increase in risk appetite for equity and bond markets.

"Clearly resource stocks have been belted in recent weeks and months, and you're seeing a bit of money coming back into them, as well as defensive and yield stocks," UBS managing director George Kanaan said.

"In this era when commodity prices are lower than they were, the Australian dollar needs to be lower. But the fact that it's not, and the fact that it rallied today, cuts a little bit into growth prospects," he said.

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

What was the ECB "big bazooka" bond‑buying plan and why didn’t it lift the Australian sharemarket?

The ECB announced a new bond‑purchase program to buy bonds of debt‑ridden eurozone countries to help fix Europe’s banking crisis and prevent a break‑up of the monetary union. While European, US and many Asian markets jumped, Australia’s sharemarket barely rose because local investors remained focused on domestic issues — notably fears of a post‑commodity boom, a slowing Asian/Chinese economy and falling iron ore prices.

How did global markets react to the ECB bond‑purchase announcement?

European markets rallied (Frankfurt up 2.9%, Paris up 3.1%, London up 2.1%), US indices rose (S&P 500 up about 2%, Dow Jones up about 1.9%), and major Asian bourses also climbed (Shanghai up 4.2%, Hong Kong up 2.4%, Japan up about 2%). Australian markets, however, were much less enthusiastic.

Why did the Australian dollar jump and what does a firmer AUD mean for Australian companies?

The Australian dollar rose by nearly one US cent after the news. A stronger AUD can hurt Australian companies that earn a large portion of profits in foreign currencies because it reduces the local‑currency value of those overseas earnings and can cut into growth prospects, especially when commodity prices are weaker.

How are resource stocks and yield/defensive stocks responding after the ECB announcement?

Analysts noted some money was flowing back into resource stocks after recent weakness, and there was also interest in defensive and yield stocks. However, resource names remain under pressure from lower commodity prices and concerns about demand, particularly from China.

What role did concerns about China and iron ore prices play in Australia’s muted market reaction?

Fresh worries about China’s economy and falls in the price of iron ore were key reasons Australian investors didn’t fully embrace the global rally. These factors feed into a broader worry about a post‑commodity boom environment for Australia.

Did Australian officials comment on the ECB move and its importance?

Yes. Federal Treasurer Wayne Swan described the ECB program as a 'positive step towards putting Europe back on a sustainable footing.' Analysts also said the move should ultimately be good news for Australia, even if local sentiment remained cautious.

Should investors expect an immediate boost in Australian risk appetite because of the ECB action?

The article reports only a small increase in risk appetite for equity and bond markets locally. While some investors welcomed the news, many Australian investors remained cautious and did not fully exploit rallies elsewhere in Asia, indicating any boost was modest and selective.

How might the ECB bond‑buying program affect Australia over the longer term?

The article suggests that, in time, stabilising Europe could be positive for global growth and therefore for Australia. But near term the market focus is on domestic challenges — lower commodity prices and an Asian slowdown — and a relatively strong Australian dollar despite weaker commodity prices, which could weigh on growth prospects.