China's rate cut spurs hopes for Australia to bounce back strongly

The People's Bank of China on Friday slashed the one-year benchmark lending rate by 40 basis points to 5.6 per cent and the one-year benchmark deposit rate by 25 basis points to 2.75 per cent. Photo / Thinkstock

The Australian sharemarket looks set to bounce back from its worst week in 18 months thanks to China's unexpected interest rate cuts.

The People's Bank of China on Friday slashed the one-year benchmark lending rate by 40 basis points to 5.6 per cent and the one-year benchmark deposit rate by 25 basis points to 2.75 per cent.

The central bank's first rate cuts in more than two years pushed United States stocks to records and bumped up shares across European markets.

Commodity prices also rose, all but guaranteeing gains when the Australian bourse opens today.

"All roads lead north," CommSec chief economist Craig James said. "If we can't get an increase in our sharemarket on Monday, I don't know when we can get one.

"The futures market is pointing to a gain of 52 points, or 1 per cent. If we can record that sort of gain, we'll be well on the way to wiping out the losses from the previous week."

Australian stocks lost 2.75 per cent last week, the largest weekly drop since June 2013. The resources sector was the main source of weakness, but did stage a modest recovery before the close. James said that for the early part of this week, the local market was likely to take its lead from the US before it closes for Thanksgiving.

Capital expenditure figures to be released by the Australian Bureau of Statistics on Thursday will be the key domestic data this week - but are set to have a greater impact on the local currency than stocks.

"If we do have an improvement in investment expectations, then the Aussie dollar will certainly key off that," James said.

The listing of the Medibank Private would also be important, he added.

"A number of people have been trying to lighten the load of other shares to be able to take on Medibank. Once that float's out of the road, then we can get down to effectively normal business in Australia."

In the US, the Dow Jones industrial average and Standard & Poor's 500 index carved out all-time highs, extending the market's gains for the week. It was the third record close for the Dow in the week and the fourth for the S&P 500.

The latest records extended a comeback in the S&P 500, which has increased 11 per cent since plunging in mid-October. A strong third-quarter earnings season, on top of a recent string of positive US economic data on housing, jobs and manufacturing, have helped put investors in a buying mood.

- AP