Stocks, dollar bounce back on rate cut

Despite mixed leads from the US and Europe, investors returned to the Australian sharemarket yesterday, pushing it back above the pyschologically important 4000-point barrier.

Despite mixed leads from the US and Europe, investors returned to the Australian sharemarket yesterday, pushing it back above the pyschologically important 4000-point barrier.

The Reserve Bank's decision to cut the cash rate by 25 basis points provided some support, and the benchmark S&P/ASX 200 index rose 58.7 points, or 1.5 per cent, to 4043.7 points, while the broader All Ordinaries index closed up 59 points, or 1.5 per cent, at 4092.4.

Some economists had predicted the RBA would slash 50 basis points from the official cash rate. The decision took the official rate to 3.5 per cent, a figure not seen since late 2009.

But most economists welcomed the decision to cut rates by 25 basis points. "There was a reasonable contingent expectation that the RBA would cut rates by 50 basis points, but the bank played a much calmer hand than that," the head of research at National Australia Bank, Peter Jolly, said.

"The RBA said inflation was low, which gave them room to support growth. And they did - 25 basis points was a sensible outcome."

Bond futures rose slightly following the central bank's decision, while the dollar finished higher against the US greenback at US97.82? yesterday, up from US96.65? on Monday.

"The Australian dollar firmed all morning to US97.57? ahead of the decision, then whip-sawed on the headlines, then decided that the RBA was not dovish enough and continued rallying to US97.84?," the head of Asia-Pacific research at TD Securities, Annette Beacher.

Analysts said the market still presumed the RBA was in "easing mode".

"Clearly, global and domestic conditions could weaken further and banks may only pass on some of this cut to borrowers, and thus there is scope to cut more," Greg Gibbs, a senior currency strategist at RBS Global Banking, said.

Analysts said much would now depend on whether the interest rate cut gave consumers enough confidence to begin spending again as household savings rates remained at 20-year highs.

Away from the focus on interest rates, the market was dominated by a 19 per cent fall in the value of Qantas shares to a record low of $1.155, after the airline warned that pre-tax earnings would fall as much as 91 per cent this financial year.

Among the major banks, ANZ gained 45? to $21.32, National Australia Bank rose 52? to $22.55, Westpac was up 39? to $20.59, and Commonwealth Bank firmed 95? to $50.

In the resources sector, global miner BHP Billiton rose 41? to $31.16, and Rio Tinto was up 85? to $53.75.