Stocks up on hopes for world economy

STOCKS rose for the second day to a three-week high on economic data that raised hopes the global economy might weather a recession in Europe this year.

By InvestSMART · 5 Jan 2012

By InvestSMART ·
5 Jan 2012

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STOCKS rose for the second day to a three-week high on economic data that raised hopes the global economy might weather a recession in Europe this year.

The S&P/ASX 200 Index jumped 86.6 points, or

2.1 per cent, to 4187.8 after a second night of big gains in Europe and after Wall Street began the year with its main indices up 1.5 per cent.

A widely watched US index of manufacturing activity, the ISM index from the Institute for Supply Management, showed that the sector expanded at the fastest pace in six months last month. It came in at

53.9 from 52.7 in November.

Separate measures of production, employment, new orders and exports also jumped, as the first US economic data of the year underlined the resilience of the sector.

"The overall message of the report suggests durability ahead for US production in the face of likely external headwinds," said Citigroup economist Steve Weiting.

As well, a measure of China's services industry climbed to the highest in

six months. That followed

a survey of China's manufacturing sector released on Monday that beat forecasts.

Financial markets are looking for signs that growth in the US, and still-strong expansion in Asia, will prove enough to protect the world economy from any shocks that Europe may deliver in 2012.

But given the scale of the crisis in Europe last year, there is still nervousness in the US that a protracted European recession will further erode demand

as well as denting orders from Asia.

City Index's Peter Escho said the pick-up on the Australian market was due to commodity prices "making up for their underperformance last year", but he cautioned that yesterday's sharp gains were unlikely to be sustained for long. "There's still a bit more negative earnings news to flow through the market," he said.

The mining sector led the pack higher, moving up 3 per cent. BHP Billiton surged

4.1 per cent to $36.22 while Rio Tinto climbed 2.9 per cent to $63.15, both closing at a three-week high.

Energy stocks got an extra boost after US oil prices rose to their highest since May, fuelled by mounting concerns over a supply disruption from Iran. Santos put on 2.5 per cent to $12.65 and Woodside Petroleum climbed 2.3 per cent to $31.40.

Even the financial sector managed to find some joy, gaining 1.8 per cent, despite concerns that the imminent rollover of $120 billion of debt in Europe could put pressure on banks' funding sources.

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Frequently Asked Questions about this Article…

Why did Australian stocks rise to a three-week high on the ASX?

Stocks rose after positive global economic data raised hopes the world economy can weather a European slowdown. The S&P/ASX 200 jumped 86.6 points (about 2.1%) to 4,187.8 following gains in Europe and a strong start to the year on Wall Street, supported by upbeat US and Asian activity indicators.

What does the ISM manufacturing index reading of 53.9 mean for investors?

An ISM reading of 53.9 (up from 52.7) signals US manufacturing expanded at its fastest pace in six months, with production, employment, new orders and exports rising. For investors, that suggests resilience in US production and can be a positive sign for cyclically sensitive stocks and global growth expectations.

How did commodity prices and mining stocks influence the market rally?

Commodity prices helped fuel the rally and the mining sector led gains, rising about 3%. Major miners climbed to three‑week highs—BHP Billiton surged 4.1% to $36.22 and Rio Tinto rose 2.9% to $63.15—reflecting the market’s positive response to improving commodity demand prospects.

Why did energy stocks like Santos and Woodside gain, and what role did oil prices play?

Energy stocks received a boost after US oil prices climbed to their highest level since May amid concerns about possible supply disruption from Iran. That helped Santos rise 2.5% to $12.65 and Woodside Petroleum climb 2.3% to $31.40 as investors priced in stronger oil-driven revenues for energy producers.

Are these market gains likely to be sustained or should investors be cautious?

There’s cause for cautious optimism: while stronger US and Asian data and rising commodities supported gains, market commentators warned the sharp moves may not last. Analysts noted more negative earnings news could still emerge and ongoing European risks could dent momentum, so investors should stay watchful.

How did financial stocks perform and what European risks could affect banks?

Financial stocks managed a 1.8% gain despite worries about Europe’s debt situation. The article highlights concern that the imminent rollover of about $120 billion of European debt could pressure banks’ funding sources, representing a key risk for the sector.

What impact did Chinese economic data have on global market sentiment?

Chinese data helped sentiment: a services‑industry measure climbed to a six‑month high and a separate manufacturing survey beat forecasts. Together with US strength, these Asia results supported hopes that growth in the US and Asia can offset shocks from Europe and help protect the global economy.

What should everyday investors monitor next in this market environment?

Investors should watch upcoming US economic indicators (like ISM data), Chinese manufacturing and services surveys, commodity and oil price moves, corporate earnings updates, and developments around European debt rollovers—these factors were cited in the article as key drivers of market direction.