Markets want Europe to match rhetoric

30 Jul 2012, 5:59 pm   -   Source: AAP

Growing optimism in global financial markets about the economic outlook has lessened the need for further stimulus measures in Australia.

The need for Australia to stump up stimulus measures to cope with another global economic crisis is looking less likely if European leaders deliver on promises to protect their markets.

Australia's financial markets got off to a positive start this week after German Chancellor Angela Merkel and French President Francois Hollande released a joint statement on Friday saying they were "determined to do everything to protect the eurozone".

This followed a pledge 24 hours earlier by European Central Bank (ECB) president Mario Draghi that the bank was ready to do "whatever it takes" to preserve the euro.

The Australian sharemarket ended about one per cent higher on Monday, buoyed by gains in Europe and the US before the weekend, while the Australian dollar touched a four-month high just under 105 US cents.

Reserve Bank of Australia (RBA) governor Glenn Stevens said last week the nation's good budget position and relatively high interest rates gave policymakers greater flexibility to deliver more fiscal stimulus if required.

"Fortunately, extra stimulus doesn't look like it will be required if actions by European leaders end up living up to the current rhetoric," Commonwealth Securities chief economist Craig James said in a client note.

According to the federal government's latest monthly financial statement, the budget deficit for the 2011/12 year is likely to be better than expected due to solid revenue growth.

The underlying deficit was at $29.4 billion in the 11 months to May, the statement said.

The result is a slight improvement on predictions of a $30 billion deficit for this stage.

It also puts the budget on track to beat the May budget forecast of a deficit of $44.4 billion for the full financial year.

"Australia's budget deficit is showing consistent signs of improvement on the back of solid revenue growth, and the size of our deficit remains low on global comparisons," Mr James said.

Interest rates also look like staying on hold for longer than many economists earlier thought, against this backdrop of renewed global optimism, despite last week's benign inflation data.

RBC Capital Markets strategist Michael Turner has joined a growing number of forecasters who have pushed back their predictions for a further rate cut to later this year.

This is despite his belief that the ECB, the US Federal Reserve and the Bank of England will disappoint expectations of a material easing in policy at their meetings this week.

Mr Turner suspects that market optimism over the past few days will be shared by the RBA to some degree - "at least enough to swing the balance in favour of an on-hold decision next week".

A wide range of data is due over the coming week ahead of the RBA board meeting on August 7.

New data on Monday showed that new home sales rose for a second consecutive month in June, rising by 2.8 per cent, buoyed by a 15.7 per cent rise in multi-unit purchases.

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