ASX: ‘Classic relief rally’ as sharemarket bounces back

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The Australian sharemarket staged a stunning turnaround on Tuesday as bargain hunters swooped, shrugging off fears over China’s economy.

Almost as quickly as $60 billion was wiped from Australia’s sharemarket on Monday, $40 billion was returned in a trading day that dismissed a dismal lead from Wall Street and Europe as well as yet another sharp fall in China.

“Today was a classic example of a relief rally,” Beulah Capital chief investment officer Peter Mavromatis said.

The benchmark ASX 200 index closed 2.7 per cent higher, up 136 points to 5137, after beginning the day with investors fearing the worst as the market fell to a fresh two-year low of 4929 in early trade.

Prime Minister Tony Abbott urged investors not to “hyperventilate” over the sharemarket’s volatility and said stock market corrections were normal.

“While the Chinese economy is slowing, the US economy is gathering speed. The European economy is gathering speed,” Mr Abbott said.

Dr Mavromatis​ said after Monday’s savage sell-off, discounted high-dividend paying stocks proved irresistible to Australia’s yield-hungry investors.

“The market has taken that as a buying opportunity today,” he said.

The big four banks rebounded strongly, up 4 per cent on average, and the shares in blue chips including Woolworths, CSL and Westfield were all snapped up.

Tuesday’s 200-plus point turnaround took the market by surprise. The scene was set for a repeat of the previous day’s carnage after the futures market indicated another 4 per cent fall was in the offing.

However, a relatively modest fall at the market open was quickly reversed, with the market trading in positive territory for most of the day.

A sharp 6 per cent fall on the Chinese sharemarket when it opened just before midday AEST, marking five days of heavy losses, did not stem the buying.

China’s markets were lone losers in the Asian region, with gains recorded on most major bourses, and European and US markets were tipped to follow suit.

A 5 per cent fall in iron ore, Australia’s key commodity export, did not deter buyers and the mining stocks bounced, albeit not as strongly.

Dr Mavromatis​ said Tuesday’s rally was not a sign the worst of the global rout was over.

Volatility was likely to remain a fixture with global concerns over the stability of China’s economy and the threat of a recession still looming, he said.

“When investors panic you see a stampede and the emotional and pyschological side of investing comes out which creates additional volatility.”

QIC head of credit research and strategy Phil Miall said however markets were looking for a policy response from China to show it was managing the slowing growth in its economy.

“It is getting to that point where the question is what will be the circuit breaker for the self-fulfilling prophecy where a loss of confidence feeds into the real economy,” he said.

Monday’s sharemarket meltdown also lifted bets that the Reserve Bank of Australia may move to lower interest rates that are already sitting at a record low 2 per cent.

“Equities have stabilised today, but if we continue to get this sort of stress weakening the markets, it may bring the RBA back into play for further easing,” Mr Miall​ said. More ASX news and analysisFollow us on Twitter @BusinessDay