Aussie dollar and ties to Asian market rattle investors

Market moves.Share investors have every right to be a bit confused by what’s been going on lately.

In countries that have been stuck in the economic doldrums for years, sharemarkets are flirting with record highs.

Take the US. While its economy is showing signs of life, it’s hardly out of the woods. About 11.7 million Americans remain unemployed, yet Wall Street hit record highs in May as investors welcomed the continuation of money-printing by the Federal Reserve.

It’s a similar story in Europe, which is still mired in the financial crisis. Despite the region’s woes, Germany’s DAX index struck a record high last month.

Even in Britain, the FTSE index has been getting close to the all-time high reached during the 1999 dot-com boom.

But in Australia, which managed to avoid the worst of the Great Recession, the sharemarket has fallen over the past three months. Forget all-time highs, we’re still more than 20 per cent below the record level of late 2007.

So what’s going on?

Sure, the economy here is hardly firing on all cylinders. But we’re still in better shape than the US or Britain. So why is our market in a weaker patch?

One reason is our closeness to Asia. Given the amount of attention paid to Wall Street in market reports, one might imagine it’s the biggest influence on Australian stocks. However, this isn’t true. The US is still the biggest economy in the world, with a huge effect on global confidence.

But for Australian firms, Asia is the more important factor because that’s where our main export markets are.

More and more, our market follows the lead of what share traders are doing in Hangzhou, not downtown Manhattan.

With escalating fears of a China slowdown, the Hangzhou Composite index has fallen about 2 per cent in the past three months – a similar performance to the ASX 200.

But it’s not just our close links to Asia; after all Japan is our second-biggest trading partner and its sharemarket is still up more than 15 per cent in the past quarter.

The other thing that’s been affecting Australia’s market is our falling dollar.

When the exchange rate falls hard, it can rattle foreign investors – who own almost half our market – because it means their Aussie dollar share holdings are not worth as much in foreign currency.

For this reason, some analysts believe further big falls in the dollar could unsettle share investors further.

But while the Australian market may have underperformed in recent months, it’s still up almost 20 per cent in the past year, even if it’s a long way from the record highs seen overseas.

The original release of this article first appeared on the website of Hangzhou Night Net.

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