SIGNS of uncharacteristic conciliation in US politics have given markets something to be hopeful about, even in the face of a grinding global economic slowdown.
The markets continue to grapple with an increasingly downbeat outlook for global growth, mostly on concerns about Europe's sovereign-debt crisis and its continued bank balance-sheet problems.
The Australian sharemarket initially rallied on US President Barack Obama's highly anticipated jobs plan, but pared back gains in afternoon trading.
This left the benchmark S&P/ASX 200 Index up just 6.7 points, or 0.2 per cent, to close the week at 4194.7 points. For the week, the Australian market lost 1.1 per cent, the first retreat in three weeks. The dollar also gave up ground, for the first week in four, trading last night at $US1.0628.
President Obama yesterday called on US Congress to pass a jobs plan that would inject a bigger than expected $US447 billion ($A421 billion) into the economy through infrastructure spending, subsidies to local governments and slashing payroll taxes paid by workers and small-business owners.
In his speech announcing the jobs package, Mr Obama admitted that economic growth had stalled in America. With the Federal Reserve's options to manipulate interest rates and money supply to stimulate growth largely exhausted, many economists would agree that only fiscal action can re-energise growth in the short-to-medium term.
Republican Eric Cantor, the House majority leader, yesterday signalled a willingness to consider at least some of the measures, providing much-needed confidence for global markets.
Inflation in China retreated from a three-year high last month, reducing concerns that state planners might have to raise interest rates. Official figures showed its consumer price index rose by 6.2 per cent over August, compared with a 6.5 per cent rise in July.
Australia, meanwhile is grappling with a slew of mixed data on how the economy is faring.
Economic growth surprised on the upside, with real gross domestic product increasing by 1.2 per cent in the June quarter. At the very least, this suggests the economy has entered the current period of global uncertainty in good shape.
Still, crucial labour market figures disappointed, with the unemployment rate jumping to 5.3 per cent in August, up from 4.9 per cent two months earlier. Given labour-force data is drawn from monthly figures, some argue it provides a better snapshot of the economy.
UBS head of investment strategy George Boubouras said sharemarket valuations were attractive for long-term investors. However, defensive stocks stocks that perform well during economic slowdowns are starting to become expensive.
"Fundamentals remain secondary to the many global macro headwinds," Mr Boubouras said.
In Britain, the Bank of England this week resisted pressure for a fresh round of funds to be injected into the economy as it left interest rates at a record low of 0.5 per cent, where they have been since March 2009.
The central bank also chose not to increase its quantitative easing program.
Spot gold yesterday recovered $US27.60 to $US1873 an ounce, still well below the record high of $US1921.15 hit this week.
Frequently Asked Questions about this Article…
What was the immediate market reaction to President Obama's jobs plan and how did the Australian sharemarket finish?
The Australian sharemarket initially rallied on news of President Obama's jobs plan but pared gains in afternoon trading. The S&P/ASX 200 Index closed up just 6.7 points (0.2%) at 4,194.7, and the market ended the week down 1.1% — the first weekly retreat in three weeks.
How large is Obama's jobs package and what measures does it include for boosting the economy?
President Obama proposed a jobs package of about US$447 billion (roughly A$421 billion) that focuses on infrastructure spending, subsidies to local governments and cuts to payroll taxes for workers and small-business owners.
Why do some economists say fiscal stimulus is necessary now instead of more monetary policy?
The article notes that US economic growth had stalled and the Federal Reserve's conventional tools to manipulate interest rates and money supply are largely exhausted. Many economists therefore argue that fiscal action — like the jobs package — is the most viable way to re-energise growth in the short-to-medium term.
Did signs of political cooperation in the US affect investor confidence?
Yes. Reports of uncharacteristic conciliation in US politics — including Republican House leader Eric Cantor signalling a willingness to consider at least some of the measures — gave markets a boost of confidence despite broader global slowdown concerns.
What global risks are weighing on markets according to the article?
Markets remain concerned about Europe’s sovereign-debt crisis and ongoing bank balance-sheet problems, which are contributing to a downbeat outlook for global growth. Those macro headwinds are cited as factors that can outweigh company-level fundamentals.
How are China and Britain influencing market sentiment right now?
China’s inflation cooled slightly, with the consumer price index rising 6.2% in August versus 6.5% in July — easing fears the government will need to raise rates. In Britain, the Bank of England left interest rates at a record low of 0.5% and chose not to expand its quantitative easing program, which also influences global market sentiment.
What do recent Australian economic numbers mean for everyday investors?
Australia posted stronger-than-expected real GDP growth of 1.2% in the June quarter, suggesting the economy entered the global slowdown in relatively good shape. However, unemployment rose to 5.3% in August (from 4.9% two months earlier), signalling softness in the labour market — a mixed picture investors should watch.
Are Australian shares good value and which sectors should investors watch?
UBS investment strategist George Boubouras said sharemarket valuations look attractive for long-term investors, but warned that defensive stocks (those that do well in slowdowns) are becoming expensive. He also noted that fundamentals can be secondary to global macro headwinds, so investors should weigh valuation against broader risks.
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