Investors upbeat as deficit encourages talk of rate cuts
Meanwhile, the Rudd government unveiled a larger than expected budget deficit on Friday, prompting economists to predict further rate cuts.
For the week, the benchmark S&P/ASX200 index rose 74.8 points, or 1.5 per cent, to finish at 5116.8 points, while the broader All Ordinaries index rose 74.9 points, or 1.5 per cent, to finish at 5098.7 points.
The ASX200 has now closed higher for two weeks in a row, while the All Ordinaries index has closed higher for six weeks in a row.
The government said on Friday that the budget deficit had jumped in the past two months from the $18billion forecast in the May budget to $30.1billion this financial year, as it struggles to deal with a surprise revenue write-down of $33billion over the next four years.
The unemployment rate is expected to rise to more 6 per cent this year, making it higher than at any time during the financial crisis.
But the Rudd government says it has identified $17.4billion worth of budget cuts, describing them as "responsible savings".
According to economists, the budget deficit could have been worse without those cuts.
"What the government has chosen to do is a limited amount of extra taxes and a limited amount of spending cuts ... the outcome would have been worse if no changes were made," St George senior economist Hans Kunnen said.
"There is no easy way out. Assets were sold by previous governments to pay down debt. That option is no longer available. Improved economic growth would help. [And] further large-scale stimulatory spending does not appear to be on the political agenda."
The revised deficit came in the same week as the global chief economist of Citigroup Willem Buiter made a rare visit to Australia and he had some very positive things to say about Australia's economy.
"Australia's position is not without issues, but [its] problems are luxury problems compared to those in the rest of the advanced economy universe," Professor Buiter said.
"This is a very unusual place to be in, to see a headline suggesting that the governor of the central bank is encouraging the cabinet to be less restrictive in fiscal policy is something that I had given up hope of ever seeing," he said.
For the week, Amcor rose 24¢ to $10.79 after the global packaging company said it would split its Australasia & Packaging Distribution business from other operations.
Crown jumped 56¢ to $13.26, after it shook up senior management in a move that resulted in its Perth resort boss promoted at the expense of his Melbourne counterpart.
Rio Tinto rose $2.07 to $59.31, after the miner agreed to sell its majority stake in a NSW copper and gold mine to a Chinese company.
Whitehaven Coal slipped 17¢ to $1.96, as falling coal prices dampened the effect of a strong increase in the company's production.
Woolworths slipped 4¢ to $33.57, after the retailer's sales grew 4.3 per cent to more than $59 billion last financial year.
AGL Energy rose 1¢ to $14.75 on news that the largest solar power project in the southern hemisphere would be built in NSW, with funding from the state and federal governments and the energy company.
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The market rallied as the US sharemarket hit a record high and central banks like the Bank of England and European Central Bank kept rates low, while local talk of rate cuts after a bigger-than-expected budget deficit boosted sentiment. For the week the S&P/ASX 200 rose 74.8 points (1.5%) to finish at 5,116.8 and the All Ordinaries rose 74.9 points (1.5%) to 5,098.7, with the ASX200 closing higher for two straight weeks and the All Ords for six.
Economists have predicted further rate cuts after the Rudd government revealed the deficit had widened, but the article reports only increased talk of cuts rather than any confirmed moves. The revised deficit and a surprise $33 billion revenue write-down have increased expectations that the Reserve Bank may consider easing policy, though no decision was announced in the story.
The government said the budget deficit jumped from the $18 billion forecast in the May budget to $30.1 billion for this financial year, driven in part by a $33 billion revenue write-down over the next four years. The Rudd government said it has identified $17.4 billion of budget cuts, describing them as “responsible savings,” and economists said the deficit could have been worse without those measures.
The unemployment rate is expected to rise to more than 6% this year, which the article notes would be higher than at any time during the financial crisis. For everyday investors, rising unemployment can weigh on consumer spending and company earnings, so it’s a factor to monitor when assessing retail, consumer discretionary and broader market risk.
Citigroup’s global chief economist Willem Buiter said Australia’s problems are relatively modest—calling them “luxury problems” compared with other advanced economies—and highlighted the unusual situation where the central bank appears to be urging less restrictive fiscal policy. The comments were generally positive about Australia’s economic position.
Several moves were highlighted: Amcor rose after announcing a split of its Australasia & Packaging Distribution business; Crown jumped after senior management changes; Rio Tinto climbed after agreeing to sell a majority stake in a NSW copper and gold mine to a Chinese buyer; Whitehaven Coal slipped as falling coal prices offset higher production; Woolworths eased despite 4.3% sales growth to over $59 billion; and AGL rose on news of a major NSW solar project backed by state and federal funding. These moves reflect how corporate strategy, commodity prices and government-backed projects can quickly affect share prices.
Amcor rose 24 cents to $10.79 after saying it would split its Australasia & Packaging Distribution business from other operations, a structural change that can unlock value or focus management. AGL rose 1 cent to $14.75 on news the largest solar power project in the southern hemisphere will be built in NSW with funding from both levels of government and the company, showing how renewable projects and government support can boost energy stocks.
Rio Tinto rose $2.07 to $59.31 after agreeing to sell its majority stake in a NSW copper and gold mine to a Chinese company, while Whitehaven Coal slipped 17 cents to $1.96 because falling coal prices dampened the impact of a strong production increase. The article highlights that asset sales and commodity price trends remain key drivers for resource-sector share performance.
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