Local stocks react to US plunge

A COMBINATION of forces in the US including voter antipathy, partisanship and election year politics, has created further turmoil regarding the future stability of the US and world economies.

Following the initial defeat of the extraordinary $840 billion financial rescue package in the US, the Australian stock market had lost about $55 billion in value by the close on Tuesday, thanks largely to Wall Street's reaction to the package's failure.

At that stage, the benchmark S&P/ASX200 had fallen 176 points, or 3.66 per cent to 4,631.4, while the broader All Ordinaries was 184 points lower, or 3.8 per cent, at 4,655.2.

That led the All Ordinaries market capitalisation to fall by about $45 billion at noon.

It was the biggest fall in Australia since January 22 this year, when the S&P/ASX200 index lost 7.05 per cent and the All Ords fell 7.26 per cent.

It was a perfect collision of the forces of modern US politics - a fast-moving internet campaign, vulnerable incumbents, a weakened and unpopular president, and a tight presidential campaign - all working against securing a stable economic outlook.

Polls in the US showed widespread public opposition to the initial plan - which would've been the biggest federal intervention in financial markets since the Great Depression of the 1930s - and many Republicans saw such an enormous set-aside of taxpayer money as an unnecessary intrusion into free markets.

Describing reactions from Australian investors as "severe", Commonwealth Securities equity economist Savanth Sebastian's feelings were countered by Aequs Securities institutional dealer Ric Klusman, who reinforced that Australia's market was in fact holding up better than expected thanks to more than a decade of budget surpluses.

There are also heightened expectations that the Reserve Bank of Australia may cut official interest rates by half a percentage point next week to support the economy.