Markets Reverse On Us Result

The Age

Thursday November 6, 2008

VANESSA O'SHAUGHNESSY, INVESTMENT REPORTER

THE election win of US president-elect Barack Obama has boosted the US dollar. But economists are sceptical about whether the Democrats' victory will influence the markets.

On a day when the Australian Government revealed a much-diminished budget surplus, the S&P/ASX 200 Index gained 2.9%, adding 121.5 points to 4336.6.

This followed a 3.3% jump in the Dow Jones, a lead that helped lift Japan's Nikkei 4.5% and Hong Kong's Hang Seng 3.2%. Meanwhile the US dollar, which had fallen heavily on Tuesday night, rose against most currencies.

Last night, however, European markets were down as much as 2.5%, and US futures markets suggested a weak opening on Wall Street.

ANZ's head of international economics, Amy Auster, said financial markets were not experiencing an ordinary economic cycle.

"I think the main theme for the markets has been the past is bad," she said. "And we need to change the way things have been in the past."

But the head of derivatives at currency trading company GFT, Martin Slaney, said Mr Obama offered social change rather than economic change.

"The feel-good factor which may have been generated on a social basis from the historic nature of Obama's victory is unlikely to filter through to financial markets," he said. "The result was already 'baked in the cake', as they would say in the US."

JPMorgan chief economist Stephen Walters said markets were sanguine about the election result because, as expected, Mr Obama had won comfortably. And while "one layer of uncertainty" had been taken away, it was unclear how the president-elect's views on free trade and international relations would affect Australia.

Meanwhile, the Government's Mid-year Economic and Financial Outlook (MYEFO) showed the expected budget surplus for 2008-09 had fallen from $21.7 billion to $5.4 billion.

And the forecast 2009-10 surplus has dropped from $19.7 billion to $3.6 billion.

The reductions were due to the Government's $10.4 billion financial stimulus package and to lower economic growth forecasts. Treasurer Wayne Swan said the budget had taken a "direct hit" from the international financial crisis.

But economists questioned the Government's economic forecasts, which suggested gross domestic product would increase by 2% in 2008-09.

Several labelled the forecasts as "too optimistic".

HBOS Australia chief economist Alan Langford said that, just like the RBA's surprise decision to cut interest rates by 75 basis points, the MYEFO recognised "dampening influences" on Australia's economic growth.

"The MYEFO, if nothing else, highlights just how quickly the budget surplus can, and almost certainly will, evaporate as expenditures rise just as fast as revenues fall in the face of a slowing economy," he said.

Australian market up 2.9%

Yields on two-year US treasuries rise

US market bounces, but futures point to falls overnight

Oil surges in New York, then loses ground

Australian dollar moves in US2c range

US dollar gains on cross-rates, after earlier falls

Nikkei rises 4.5%

© 2008 The Age

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