FOUR corrections in six weeks – and it now seems the Australian share market is about to enter its fifth damaging downward spiral after a plunge in US markets.

The predicted sell-off today of local shares will be driven by the growing prospect of the US economy entering a recession, after 4000 jobs were lost in August.

One bond analyst has described equities as a “fool’s paradise” because its rebound had been artificially inflated.

Wall Street interpreted the faltering labour force as the final straw to convince the US Federal Reserve to slash the funds rate when it meets on September 18. Tokyo Junio 2007
Tokyo Stock Exchange
The likelihood of a 25-basis-point cut has gained momentum, but the state of the US economy is now thought to be poor enough to justify a 50-basis-point cut. The policy loosening is seen as vital to restore confidence in global credit markets, which have seized up as short-term interest rates peak at near decade highs.
FOUR corrections in six weeks
The weak data sent immediate shockwaves through Wall Street on Friday night, causing a damaging 1.9 per cent fall in the Dow Jones.
The tone has been set for a sober day in Australia to start the week, as analysts tip the market will open down at least 100 points.
Many analysts have been surprised by the equities turnaround since the July rout, particularly as the events that caused the rout – the US sub-prime mortgage and credit crises – remain in place.
– and it now seems the Australian share market is about to enter its fifth damaging downward spiral after a plunge in US markets.
“The longer the credit squeeze continues, the greater the likelihood that other central banks will be forced to follow the Fed and cut their own cash rates. This includes the RBA.
“If the credit squeeze continues for much longer and the US economic outlook continues to deteriorate, the RBA may actually have to contemplate a rate cut.”
The resolve of central banks will be tested this week when the Reserve Bank of New Zealand meets on Thursday but it is expected to keep rates steady at 8.25 per cent.
The predicted plunge of equities today will claw back the gains of the two main local indexes which have almost recovered all of the late July losses.
The S&P/ASX 200 is back within 144 points of its peak of 6422, which it reached in mid-July.

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