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Stocks rally as US moves to counter recession

THE markets in Australia have extended their powerful recovery, amid hopes the US can dodge a double-dip recession by keeping interest rates near zero for another two years.

THE markets in Australia have extended their powerful recovery, amid hopes the US can dodge a double-dip recession by keeping interest rates near zero for another two years.

A wave of optimism yesterday drove a 2.6 per cent rally in the S&P/ASX200 index, after the US Federal Reserve vowed to keep rates on hold until mid-2013 and stoked expectations it may recommence printing money.

The surge - matched by a jump of more than US1c in the dollar - left the ASX200 at 4141.3, almost 8 per cent below the levels near 4500 of early last week.

This was despite the wild swings and subsequent sharp recovery on Tuesday which the stock exchange chairman, David Gonski, yesterday described as "very, very historic".

Analysts are reluctant to call the bottom of the latest market slump, warning sentiment is extremely fragile, and authorities may still need to calm investors' nerves. Some expect the Fed will soon launch another round of its program to buy US Treasury bonds, known as quantitative easing, and these hopes were boosted when the Fed said it had discussed "the range of policy tools available" to boost activity.

Wall Street surged in response, and the optimism extended across Asian markets, with shares also posting gains in early European trade last night.

Westpac's chief currency strategist, Robert Rennie, said the Fed's comments were the most explicit mention of further stimulus from the central bank, and markets had welcomed the promise of stable rates.

"Markets are by their very nature liable to feed on uncertainty," Mr Rennie said. "I guess an explicit commitment to maintain this effectively zero interest rate policy until at least mid-2013 is a fairly strong commitment."

However, he cautioned that some investors doubted the Fed's ability to revive the US economy, and further volatility in markets remained likely.

Morgan Stanley's global strategist, Gerard Minack, said investors' levels of conviction remained at "rock bottom" owing to the extraordinary events playing out overseas.

"We've all been through things that we've never seen in the developed world," Mr Minack said. "The range of plausible outcomes is broader than we've ever seen and the fundamentals are dicier."

In previous recessions governments had cut interest rates or lifted their spending, but these options are unlikely in Europe and the US. Mr Minack said investors were left grappling with what else governments might do to restore confidence.

Winston Sammut, the investment director at Maxim Asset Management, said there had been fewer margin calls on investors yesterday but warned confidence had not fully returned after recent wild swings.

"Sentiment is still very fragile," Mr Sammut said. "When you see a market do what it did yesterday, it does not really give sufficient confidence that the worst is over."


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