Optimistic investors push market higher
Investors are clearly more optimistic, and stocks have now risen 5.7 per cent since November 16 - the market's recent low.
For the week, the benchmark S&P/ASX 200 Index rose 31.4 points, or 0.7 per cent, to 4583.1.
Like last week, a batch of positive economic news provided evidence that global conditions are improving slightly. But unlike last week, the biggest announcement had to do with the US Federal Reserve.
The Fed's decision on Wednesday night to print another $US45 billion every month to breathe life into its long-term bond-buying program, at least until its unemployment rate drops below 6.5 per cent, guaranteed that more money would be sloshing around the global financial system.
It might not have been a positive announcement, but it did not lead to the market dropping off. It saw the dollar jump to a three-month high, hitting US105.80¢ early on Thursday, before it settled around US105.40¢ by the close that day.
The dollar's reaction to the announcement came in the form of a cliche. Currency strategists like to say sometimes, to explain why currencies weaken or strengthen after a central bank loosens monetary policy, that traders like to "buy the rumour, sell the fact".
In the case of the Australian dollar-US dollar cross this week, that saw traders buying a bucketful of Australian dollars in the lead-up to an anticipated event - the US Fed's quantitative easing announcement - and selling them once the announcement was made.
The point of such a move is to make a little bit of profit, and that practice explains why Australia's dollar jumped to a three-month high in the early hours of Thursday morning, before slipping back.
"It happens often enough that you can't ignore it," Westpac currency strategist Sean Callow said.
"It's one of the first lessons you learn in markets: why didn't the dollar go down when the RBA cut rates? You then start to get into the realm of anticipation."
Mr Callow said that with a currency as heavily traded as the Australian dollar - the fifth-most-traded currency in the world - some traders will use it to try to see if they can make some money by reading the mind of the market.
When the US Fed intimated it was going to print more money, and thus devalue its currency, ahead of that some traders started buying Australian dollars, betting that if there was to be a broad-based sell-off of US dollars then the Australian currency would probably move as much as any currency.
On Friday, Caltex Australia flagged a return to profitability in calendar 2012, thanks to stronger sales and better refining margins. Caltex was up 27¢, or 1.4 per cent, at $19.20.
Insurance Australia Group said it would sell ailing British assets and it expected to make a $240 million loss on the deal. IAG was down 9¢, or 1.8 per cent, at $4.72.
Frequently Asked Questions about this Article…
The market rose on growing investor optimism, a string of positive economic news and supportive global policy moves. The S&P/ASX 200 gained 31.4 points (0.7%) to 4,583.1 for the week, and shares have climbed about 5.7% since the market low on November 16.
The Fed said it would buy another US$45 billion a month of long-term bonds until unemployment falls below 6.5%, effectively adding liquidity to global markets. That commitment helped underpin global risk sentiment, and while it didn’t trigger a market sell-off it did push currency moves, including a jump in the dollar to three‑month highs before it settled back.
The Australian dollar briefly jumped to a three‑month high—hitting about US105.80¢ early on Thursday—before easing to around US105.40¢ by the close. Traders who bought AUD ahead of the Fed move and sold after the announcement helped drive that volatility.
It refers to traders buying an asset in anticipation of an event (the ‘rumour’) and then selling once the event actually occurs (the ‘fact’) to lock in profits. In this article’s example, traders bought Australian dollars before the Fed’s QE announcement and sold them after, creating short-term currency swings.
Caltex Australia and Insurance Australia Group (IAG) were singled out. Caltex flagged a return to profitability in calendar 2012 thanks to stronger sales and better refining margins and rose 27¢ (1.4%) to $19.20. IAG said it would sell ailing British assets and expected a $240 million loss on the deal, and its shares fell 9¢ (1.8%) to $4.72.
Caltex flagged a return to profitability in calendar 2012, citing stronger sales and improved refining margins. The market reacted positively, lifting Caltex shares by 27¢ (about 1.4%) to $19.20.
IAG said it would sell underperforming British assets and anticipated taking a $240 million loss on that deal. The expected loss and the asset sale drove the stock down about 9¢ (1.8%) to $4.72.
According to the article, the Fed’s QE injects more money into the global financial system, which can support asset prices and lift investor sentiment. For Australian investors this can mean firmer sharemarkets and currency volatility—both opportunities and risks—depending on how traders position around policy news.
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