Australian Markets Extend Recovery From Three Week Low

Australian shares stayed supported as a recovery from three week lows extended. However, gains were limited on broad economic worries and falling banking shares. The benchmark S&P/ASX 200 index added 0.40% to close at 6517.10. The National Australia Bank Ltd fell 0.54% following the announcement of higher than expected customer remediation charges. The ANZ Bank also slipped nearly half a percent.

The Reserve Bank of Australia (RBA) noted in its Financial Stability Review that a downturn in the global economy, asset price falls or reduced availability and increased cost of borrowing could be quickly transmitted to Australia through trade and financial links. A sharp decline in global economic activity would likely see asset prices fall, as well as reduce Australia's exports and domestic activity. But the impact on Australia would depend on the exact nature of the external shock and movements in the exchange rate.

Australia's exports to China are disproportionately used in the Chinese domestic economy rather than as inputs for the production of Chinese exports. Australia's exports may therefore decline by proportionately less than global trade in response to an escalation of trade disputes, if Chinese domestic growth is maintained. But a more generalised slowdown in China could have a larger impact on domestic growth and hence the financial system.

Australian shares rebounded earlier this week as the Reserve Bank of Australia (RBA) has cut official interest rates to 0.75%, bringing the cash rate to a historical low amid rising concerns about the state of the economy. The overnight cues were largely positive as the US stocks edged up from one month low, recovering from a sharp slide in early moves.

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