The Fed rides to the rescue
A WAVE of optimism ran through markets yesterday, pushing the Australian dollar and stockmarket sharply higher, on news Chinese authorities would reduce the reserve requirements for the country's banks, and after the US Federal Reserve, leading a group of six central banks, reduced the access fee to emergency US dollar funding - a boon for Europe's troubled banks.
A WAVE of optimism ran through markets yesterday, pushing the Australian dollar and stockmarket sharply higher, on news Chinese authorities would reduce the reserve requirements for the country's banks, and after the US Federal Reserve, leading a group of six central banks, reduced the access fee to emergency US dollar funding - a boon for Europe's troubled banks.The dollar shot skywards on the news, soaring nearly US3? to $US1.03, before settling at $US1.02 by the close of local trade.The sharemarket added $30 billion of value, marking a fourth straight day of gains.But despite the euphoria, investors remain wary that little in Europe has changed, and with four weeks to go until the end of a horrid year caution still reigns.The benchmark S&P/200 closed at 4228.6, up 2.6 per cent, or 108.8 points higher.Mining stocks enjoyed their best day in two months after inflation concerns in China eased.Global heavyweight Rio Tinto rose $2.97, or 4.72 per cent, to $65.92, while rival BHP Billiton was up $1.43, or 4.1 per cent, at $36.35.Markets applauded co-ordinated efforts by the central banks of the US, Britain, Canada, Japan, Switzerland and the euro zone to ease liquidity problems and make it cheaper for banks to borrow emergency funds.The move came amid strains in US dollar funding, and were aimed at seeing off a credit freeze that would make banks reluctant to lend to customers and to each other, as happened during the 2008-09 financial crisis."Up until now people have been concerned that European policymakers just don't get it, that they keep thinking that if they make these promises the market's going to just believe them," said Chad Padowitz, chief investment officer at Wingate Asset Management. "Their actions on Wednesday night were one of the first steps of somebody blinking first."Investors received a further boost to confidence from strong US employment data. In November 206,000 jobs were created in the US, the biggest monthly rise this year.But the chief economist at Morgan Stanley, Gerard Minack, said the central banks' efforts were unlikely to fix the structural problems plaguing the global financial system, and would fail to address Europe's problems."This is a palliative measure designed to ease the symptoms of what remains the big fundamental issues: pressure to de-lever throughout the developed world, overlaid with the contagion in Europe," he said. "The developments do not change this, but they reduce the tail risk of a post-Lehman-like disorderly tightening of global credit conditions."Meanwhile, Australian mining investment looks set to contribute more than 1.5 per cent growth to gross domestic product for the September quarter, a week before the Reserve Bank meets to decide on interest rates."There's a massive rise in engineering construction going on," said Paul Bloxham, chief economist at HSBC. "Engineering construction numbers were up 22 per cent in the quarter, and up 50 per cent over the year."Mr Bloxham said he was forecasting GDP growth in the September quarter of 1.1 per cent, after parts of the economy - net exports, public demand and inventories - contract. "I think it's going to be quite a critical piece of information," he said.CommentThe euphoria on global markets may be short lived unless a fix is found for the fiscal and political problems thatface Europe.AdeleFerguson,Page 6CommentThe buck still stops with the ECB AmbroseEvans-Pritchard, PAGE 6Inside"If we can put Europe behind us ... I think our market [will] go well."Market report, Page 10