Australian sharemarkets have reversed huge early losses of more than 3% to be trading just near yesterday’s close at midday today.
The S&P/ASX200 dropped more than 150 points in the first 45 minutes of trading, falling as low as 5448.5, before staging a dramatic reversal to nudge into positive territory by midday.
But traders will be bracing themselves for yet another plunge this afternoon, with the S&P/ASX200 heading back into a negative trend just after midday. At 12.25pm the S&P/ASX200 is trading at 5606.9, down 0.2% on yesterday’s close.
The extreme volatility could be a sign that traders just don’t know what to make of events in the US overnight, the most significant of which was a 0.5% interest rate cut by the US Federal Reserve.
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The cut follows last week’s 0.75% cut and has been interpreted as either a preparedness to take decisive action or a panicked response by various economic analysts.
The cut caused an initial spike on US markets, but by close the benchmark Dow Jones Index had fallen overall by 0.3% to 12,442.83.
One obvious consequence of the cut has been to drive the Australian dollar higher. At 12.25pm the dollar is worth US89c, up from yesterday’s US88.77c close.
Economic data released in the US overnight sent a mixed message to the markets. A key consumer confidence fell 2.7 points in January and the S&P/Case Shiller index of housing prices fell for its 16th consecutive month, but orders for manufactured durable goods exceeded expectations to lift 5.2% in December.
In Australia, however, all signs except the market continue to point to an interest rate rise when the Reserve Bank of Australia meets on Tuesday next week. In December total private sector credit by rose 1.1%, slightly below market expectations but still enough to adds up to an unsustainable 16.5% increase for 2007.
And an Access Economics report found that the value of committed business investment increased by a massive 55% in December, thanks primarily to significant new projects moving ahead in the resources sector.