September 26, 2011
THE local sharemarket is expected to remain volatile this week, as investors sweat on co-ordinated policy action to deal with the European debt problem - which has wiped $12 trillion from global equities since May - and halt any deepening of the financial crisis.
Despite a positive finish on Wall Street, where the Dow Jones industrial average closed 0.4 per cent higher on Friday, and rises on key European bourses, the market is likely to be soft, weighed down by weak commodity prices on expectations of weak global growth.
The Dow fell 6.4 per cent last week - the biggest drop since October 2008, in the midst of the global crisis. The fall was mirrored locally as the ASX 200 dipped below 4000 to close the week at 3903.2.
All eyes, however, remain on Europe, after US Treasury Secretary Tim Geithner warned that failure to overcome the Greek-led market turmoil threatened to cause "cascading default, bank runs and catastrophic risk".
Mr Geithner's commentary set the tone for the International Monetary Fund's annual meeting in Washington.
Billionaire investor George Soros was similarly forthright, arguing that "something needs to be done" to safeguard Europe's banks because Greece might be unable to avoid default.
The IMF responded to the urgency of the situation, saying after its meetings that it was ready to "strongly support" European nations' efforts to resolve the 18-month debt crisis.
"The global economy has entered a dangerous phase, calling for exceptional vigilance, coordination and readiness to take bold action from members and the IMF alike," the fund said.
"We are encouraged by the determination of our euro-area colleagues to do what is needed to resolve the euro-area crisis.
"The IMF stands ready to strongly support this effort as part of its global role."
The response of the G20 meeting of finance ministers was similarly encouraging, helping to support equities markets in the US and Europe.
The IMF added to concerns yesterday, saying its $US384 billion ($392bn) lending chest might not cover all loan requests if the global economy worsened.
AMP Capital Investors investment strategy head Shane Oliver said "concrete actions" were required, not just soothing words.
"Investors want action to back up the rhetoric," Dr Oliver said.
"Markets in Europe were up (on Friday) but commodity prices weakened, which suggests a soft opening for mining stocks and a flat day overall."
The Grattan Institute's Saul Eslake said markets wanted a package to deal with all aspects of the current crisis, not just parts of it.
"The response needs to be coherent with a unity of purpose, instead of the current squabbling between the Germans and the Americans," he said. "It also needs to be credible, backed up by financial commitments that convince the markets of the determination of the authorities."
A credible plan, Mr Eslake said, would involve recognition that Greece would not be able to repay or service its debt load. Banks exposed to the country faced writedowns and the need to recapitalise or merge. Finally, a buffer had to be established to separate Greece from other countries, preventing European contagion.
Last week, about $3.4 trillion was erased from global equities, as stocks reached their lowest value since March 2009.
Central banks globally have already slashed interest rates to record lows and started bond purchases as they desperately try to kick-start growth.
Federal Treasurer Wayne Swan, in Washington for the IMF and World Bank meetings, said the G20 nations were in a "sober" mood. "Ministers appreciate the challenge and are certainly up for the response," Mr Swan told ABC TV yesterday.
"We do need not just a European response in the first instance. We always need bodies like the G20 and the IMF backing up the Europeans."
The Australian dollar was trading at US97.9c yesterday.
Article by Richard Gluyas, Markets From:The Australian