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.
Comment
The euphoria on global markets may be short lived unless a fix is found for the fiscal and political problems that
face Europe.
Adele
Ferguson,
Page 6
Comment
The buck still stops with the ECB Ambrose
Evans-Pritchard, PAGE 6
Inside
"If we can put Europe behind us ... I think our market [will] go well."
Market report, Page 10
Frequently Asked Questions about this Article…
What triggered the sudden market optimism and lift in the Australian sharemarket?
Markets rallied after Chinese authorities signalled they would reduce bank reserve requirements and the US Federal Reserve, together with five other central banks, cut the access fee to emergency US dollar funding. The combination of easier Chinese liquidity and coordinated central-bank action pushed the ASX higher and added about $30 billion of market value.
Which central banks were involved in the coordinated move to ease US dollar funding, and why does it matter for investors?
The US Federal Reserve led a co-ordinated move with the central banks of Britain, Canada, Japan, Switzerland and the euro zone to reduce the cost of emergency US dollar funding. For investors this matters because it helps ease dollar funding strains, lowers the risk of a credit freeze like 2008–09, and can support bank lending and market confidence in the short term.
How did the Australian dollar and major market indices respond to the news?
The Australian dollar jumped to about US$1.03 before settling near US$1.02, while the benchmark S&P/ASX 200 closed at 4228.6, up 2.6% (108.8 points). The report described a fourth straight day of gains for the sharemarket following the announcements.
Which mining stocks benefited most from the rally and what were their moves?
Mining stocks led the gains after Chinese inflation concerns eased. Rio Tinto rose $2.97 (about 4.72%) to $65.92, and BHP Billiton climbed $1.43 (about 4.1%) to $36.35, marking some of the best days for the sector in two months.
Does this coordinated central-bank action solve Europe's deeper economic problems?
According to the article, experts warned it does not. Morgan Stanley’s chief economist said the measures are a palliative that reduce near-term tail risk but are unlikely to fix the structural and political problems plaguing Europe, so investors should remain cautious about long-term European contagion risks.
How did recent US jobs data affect investor confidence?
Investors got an extra boost from strong US employment data: the US added 206,000 jobs in November, the biggest monthly rise that year. Strong jobs numbers supported confidence that the global economy may be more resilient, reinforcing the positive market reaction to the central-bank moves.
What did the article say about Australian mining investment and its impact on GDP?
The article noted that Australian mining investment looked set to add more than 1.5 percentage points to GDP growth in the September quarter. HSBC’s chief economist highlighted big rises in engineering construction (up 22% in the quarter and 50% over the year) and forecasted about 1.1% GDP growth for the quarter.
Should everyday investors expect the market euphoria to last after these interventions?
The article advises caution. While coordinated central-bank action and positive data reduced the immediate risk of a disorderly tightening in credit markets and sparked a rally, commentators warned the moves may be short‑lived unless a durable fix is found for Europe’s fiscal and political problems—so many investors remained wary.
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