Shares surge as US breaks debt deadlock

THE local sharemarket rose sharply yesterday in a relief rally after the US government avoided a debt default with an eleventh-hour agreement to reduce its deficit.

By InvestSMART · 2 Aug 2011

By InvestSMART ·
2 Aug 2011

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THE local sharemarket rose sharply yesterday in a relief rally after the US government avoided a debt default with an eleventh-hour agreement to reduce its deficit.

The US President, Barack Obama, said the deal would cut about $US1 trillion in spending over 10 years and avoid a default, which would have had a devastating effect on global markets.

The benchmark S&P/ASX200 index rose by 73.2 points, or 1.65 per cent, to 4497.8. The broader All Ordinaries index was up by 72.6 points, or 1.61 per cent, to close at 4573.1.

A dealer with IG Markets, Chris Weston, said the US debt deal had bolstered regional markets. "Asian markets are very buoyant and the futures are predicting a pretty good relief rally in the US overnight."

The deal needs Congress's approval, including the establishment of a bipartisan congressional committee, which is to report back by November with a proposal to further reduce the deficit.

"The big question is, do we get that downgrade to US debt," Mr Weston asked. "While it's a good situation that we've avoided default, people are reluctant to take sizeable bets, so we're probably seeing a bit of short covering on the back of that."

Locally, resources companies and banks were the main beneficiaries of brighter investor sentiment.

National Australia Bank rose 49?, or 2.04 per cent, to $24.49, ANZ rose 46?, or 2.2 per cent, to $21.29, Commonwealth Bank rose 82? to $50.09 and Westpac rose 39? to $20.81.

Resources stocks were higher, with BHP Billiton gaining 88? to $42.30 and Rio Tinto $1.52 higher at $81.52. Other big movers were Fortescue Metals, up 20?, or 3.3 per cent to $6.51, and Lynas, up 8? to $2.23. Macarthur Coal rose 28? to $15.83 after it told shareholders to take no action after Peabody Energy and ArcelorMittal confirmed a $15.50 a share takeover offer.

Telstra submitted details of its structural separation, required as part of the rollout of the national broadband network, with the competition regulator. Its shares rose 3? to close to $3.02.

WINNERS LOSERS

WINNERS

Bow Energy 9.80%

Kagara 9.02

Karoon Gas 7.05

Bathurst Resources 6.67

Pacific Brands 6.15

Energy World Corp 6.06

White Energy Co 5.61

ERA 5.45

Atlas Iron 5.19

Duet Group 5.16

LOSERS

OceanaGold cdi -4.22%

Reject Shop -1.57

AWE -1.20

Australand Property -1.20

Sundance Resources -0.95

Aurora Oil & Gas -0.63

SP AusNet -0.54

OM Holdings -0.54

Gryphon Minerals -0.53

Alacer Gold Corp -0.45

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Frequently Asked Questions about this Article…

Why did Australian shares surge after the US avoided a debt default?

The local sharemarket jumped in a relief rally after the US reached an eleventh-hour agreement to reduce its deficit and avoid a default. The deal — which US President Barack Obama said would cut about US$1 trillion in spending over 10 years — eased fears of a global market shock and boosted investor sentiment.

How much did the S&P/ASX200 and All Ordinaries rise during the rally?

The benchmark S&P/ASX200 rose by 73.2 points (about 1.65%) to 4,497.8, while the broader All Ordinaries index increased by 72.6 points (about 1.61%) to close at 4,573.1.

Which sectors and big companies benefited most from the market rally?

Resources and major banks were the main beneficiaries. Bank share prices mentioned include National Australia Bank at $24.49, ANZ at $21.29, Commonwealth Bank at $50.09 and Westpac at $20.81. Resource names that rose included BHP Billiton ($42.30), Rio Tinto ($81.52), Fortescue Metals ($6.51), Lynas ($2.23) and Macarthur Coal ($15.83).

What did market commentator Chris Weston say about the rally and investor behaviour?

Chris Weston of IG Markets said the US debt deal had bolstered regional markets, noting Asian markets were buoyant and futures pointed to a relief rally in the US. He also cautioned that investors remain reluctant to take large bets, suggesting some of the move was short covering, and raised the question of whether a downgrade to US debt might still occur.

What happened with Telstra and its role in the national broadband rollout?

Telstra submitted details of its required structural separation — part of the national broadband network rollout — to the competition regulator. Telstra's shares rose about 3% to close near $3.02 on the news.

What was the update on Macarthur Coal and the takeover offer?

Macarthur Coal rose to $15.83 after advising shareholders to take no action, following confirmation that Peabody Energy and ArcelorMittal had made a takeover offer of $15.50 a share.

Which smaller companies were notable winners and losers on the day?

Notable winners included Bow Energy (+9.80%), Kagara (+9.02%), Karoon Gas (+7.05%), Bathurst Resources (+6.67%) and Pacific Brands (+6.15%). Notable losers included OceanaGold CDI (-4.22%), Reject Shop (-1.57%), AWE (-1.20%) and Australand Property (-1.20%).

Does the US debt agreement eliminate all market risk for investors?

No. The article notes the deal still needs congressional approval and the establishment of a bipartisan committee to report back by November. Commentators also flagged the lingering risk of a US debt downgrade and said investors remained cautious, which suggests some uncertainty remains despite the relief rally.