THE Australian sharemarket is expected to open almost 1 per cent higher today after Europe’s leaders agreed at the weekend to extend billions of euros in aid to the region’s struggling banks, in a bid to promote growth and prevent the debt crisis from spreading.
The German and Canadian markets recorded their biggest one-day rallies in seven months, soaring 4.33 per cent and 4.75 per cent respectively, after European officials agreed to allow struggling Spanish and Italian banks to tap the region’s €500 billion ($618 billion) bail-out fund directly – without having to record such loans on their national balance sheets, thereby avoiding a rise in their public debt. Global investors cheered that decision and an agreed €120 billion ”growth pact”.
Italy’s bourse soared 6.59 per cent on the news, while Spanish shares surged 5.66 per cent. On Wall Street, the Dow Jones Industrial Average rose 2.2 per cent and London’s FTSE closed 1.42 per cent higher.
Futures markets last night pointed to a 38-point rise on Australia’s benchmark ASX 200 index today, which is expected to be replicated on bourses across Asia.
The decision to grant Spain and Italy access to the bail-out funds was considered a backdown by Germany’s pro-austerity Chancellor, Angela Merkel, who until now had been insisting that common funding
for Europe’s banks ought to be allowed only once a centralised body had control of national budgets.
Will Seddon, a fund manager at White Funds Management, said the decision would give markets a fillip.
”It should improve the current stress in bond markets at the moment by taking the pressure off the borrowing costs for Spain and Italy,” he said. ”[And] the growth pact is a positive step … [because] the current focus on austerity alone clearly isn’t working.”
The global rally will be welcomed by local shareholders who have endured a horror financial year. In the 12 months to June 30, the Australian sharemarket fell by 11.1 per cent, with total returns down 7 per cent. At the same time, returns on bonds were the best in 15 years, up 14.6 per cent.
Despite the relief in Europe, investors will be wary of further signs of weakness in China where manufacturing activity slowed last month. China’s official purchasing managers’ index (PMI) slipped to 50.2 in June, from 50.4 a month earlier. (A PMI reading above 50 indicates expansion, while a reading below 50 means contraction).
The Reserve Bank board meets tomorrow to decide on interest rates. The market expects the cash rate to remain unchanged at 3.5 per cent.
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