Traces of hope, despite slowdown

Markets continue to grapple with an increasingly downbeat outlook for global growth, mostly over concerns about Europe's sovereign debt crisis and continued bank balance sheet problems in the region.

The Australian sharemarket initially rallied on the back of US President Barack Obama's highly anticipated jobs plan but pared back gains in the late afternoon. This left the S&P/ASX 200 index up just 6.7 points, or 0.2 per cent, to close the week at 4194.7 points.

For the week, the Australian market lost 1.2 per cent, the first retreat in three weeks. The Australian dollar gave up ground for its first week in four, trading last night at $US1.061.

President Obama called on the US Congress to pass a jobs plan that would inject a bigger-than-expected $US447 billion ($421 billion) into the economy through infrastructure spending, local government subsidies and slashing payroll taxes paid by workers and small businesses.

Mr Obama said that economic growth had stalled in America, and with the US Federal Reserve's options to manipulate interest rates and money supply to stimulate growth largely exhausted, many economists agreed that only fiscal action could re-energise growth in the short to medium term.

Republican Eric Cantor, the House Majority Leader, signalled a willingness to consider some of the measures, providing some much-needed confidence for global markets.

In another boost for confidence, inflation in China retreated from a three-year high during August, reducing concerns that state planners might have to raise interest rates.

China's consumer price index rose by 6.2 per cent over August, compared with a 6.5 per cent rise in July.

Australia is grappling with a slew of mixed data on how the economy is faring. Economic growth surprised on the upside, with real gross domestic product increasing by 1.2 per cent during the second quarter. At the very least this suggests the economy overall has entered the current period of global uncertainty from a strong starting point.

However, labour market figures disappointed, with the unemployment rate jumping up to 5.3 per cent in August, up from 4.9 per cent two months earlier. Given labour force data is drawn from monthly figures some argue they provide a more current snapshot of the economy.

UBS head of investment strategy George Boubouras said sharemarket valuations remained attractive for long-term investors although defensive stocks - which perform well during economic slowdowns - were starting to become expensive.

Market report Page 16