Market turmoil not over, economists warn
Economists are warning share market investors that more financial turbulence is ahead, despite yesterday’s brief respite and a good day on Wall Street.
In the world of financial markets, confidence is a key factor.
Veteran broker Michael Heffernan from Austock Securities remains optimistic about medium-term investing in the share market, but he says it’s going to be a bumpy ride in the short term.
“Clearly this is quite a severe one, given the fact that in the space of Monday and Tuesday this week, we declined actually 10 per cent, which is almost unprecedented in my experience in a two-day jolt for the market,” he said.
Along with most other international indices, Australia’s share index, the All-Ordinaries, finished up more than 4 per cent yesterday. For almost two weeks it had been falling each day.
The market rise came as the United States Federal Reserve slashed a key interest rate to help ward off a recession.
Chris Caton is the chief economist for the BT Financial Group.
“I don’t think this is the start of a clear turnaround and strength in the Australian market,” he said.
“I think so long as the financial system problems in the US remain unresolved, and so long as there’s a big question over economic growth in the US, market volatility will continue for several weeks, yet if not months.”
It’s these factors the Reserve Bank of Australia will have to take into consideration next month when it meets to decide which way it will go on interest rates.
Analysts say news that inflation hit 3 per cent over the year to December will be putting pressure on the Reserve to lift rates.
Domestic vs international factors
Australian National University economist Bob Gregory says it’s going to be a tough decision to make.
“In many ways, this is the most difficult of times for monetary policy, because if you only look at domestic factors, the message seems clear that interest rate increases will slow the growth a little and help inflation,” he said.
“On the other hand, if you look at international factors, they’re all running the other way, and suggesting you should not increase interest rates.
“So balancing internal and external things are really quite difficult for the bank at the moment.”
Mr Caton agrees it’s a dilemma and says the Reserve Bank has to get it right.
“The underlying inflation measures that the Reserve Bank focuses on are tracking close to 3.5 per cent over the past year and the top of their target range is 3 per cent,” he said.
“If that’s the only thing that the Reserve Bank knew, they’d hardly have a choice, they would have to raise rates.”
“On the other hand, if all they knew was the volatility in financial markets and the big questions, the increasing questions about the US economy, then there’s no way in the world they would raise rates. So they’ve got to sort this out.”
Source: www.abc.net.au
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