Global jitters counter positive data
By Clancy Yeates | smh.com.au | 03 September
Investors have shrugged off the latest batch of upbeat economic news to drive the market into the red, amid growing fears share prices were pushed too high during the reporting-season rally.
The ASX200 slumped 1.7 per cent yesterday to 4438.2 despite figures showing the economy grew by 0.6 per cent in the June quarter, compared with March quarter growth of 0.4 per cent.
The figure confirmed Australia had avoided the worst of the crisis, but investors are now bracing for higher interest rates and the winding back of emergency stimulus measures. As overseas rallies also fade, local investors said they thought the market was due for a correction – shares rose nearly 10 per cent in the recent reporting season.
A sharp fall would spell the end of a so-called V-shaped recovery, where stock prices take off from their lows without a major setback.
"'Although the numbers are good, they're still pointing to a pretty long, slow recovery, and certainly not the very sharp recoveries we've had in the past," the chief economist at Nomura Australia, Stephen Roberts, said.
Government assistance propped up a large share of the economy's growth, raising the question of how the private sector would fare once emergency measures were wound back. Business investment increased 1.9 per cent after falling 6.1 per cent in March. It was buoyed by spending on schools and public housing.
Consumer spending grew by 0.8 per cent after $900 cash handouts were sent to millions of bank accounts. But even with this support, households were cautious enough to increase the share of income saved from 1.8 per cent to 4 per cent. Alongside cuts to government spending, investors are preparing themselves for a jump in interest rates from record lows.
The odds of an interest rate rise this year firmed yesterday, and markets now say there is a 50 per cent chance the Reserve Bank will raise the cash rate from 3 per cent next month. An analyst at Fat Prophets, Colin Whitehead, said investors were concerned about the Government's ability to keep inflation under wraps without denting confidence too heavily.
A wrong move could lead to a double dip or W-shaped recovery.
"The risk of a double-dip recession is essentially a risk of timing," he said. Further denting the market sentiment, Wall Street fell 2.2 per cent on Tuesday night despite positive signs for home sales, and the Shanghai sharemarket is now more than 20 per cent off its August peak.
Fund managers are also worried that share prices are out of step with corporate earnings, after a reporting season that was characterised by non-committal statements by companies about their outlook.
The managing director at White Funds Management, Angus Gluskie, said positive economic news was enough to correct this growing sense that the sharemarket had been overbought. "Investors have spent the last three months focusing on the fact that a threat of a downturn has disappeared, so that's already been taken into account," Mr Gluskie said.
First published by Smh.com.au on September 03 2009
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