Investors spooked by rescue package fears and oil price spike: Economy roundup

The rally inspired by the US Government’s $US700 billion bale-out package was short-lived, with stocks on Wall Street plummeting overnight and the Australian market following suit.

The rally inspired by the US Government’s $US700 billion bale-out package was short-lived, with stocks on Wall Street plummeting overnight and the Australian market following suit.

The local sharemarket fell by more than 2% in initial trade, before steadying as the morning went on. The benchmark S&P/ASX200 index was down 1.7% or 85.4 points at 4935.1 at 11:30am AEST.

Besieged financial services companies Macquarie Bank and Babcock & Brown, which had rebounded strongly in recent days, sank more than 5% in early trade.

Australian investors are nervously watching developments on Wall Street, where key regulators are currently negotiating the size and scope of US Treasury Secretary Henry Paulson’s giant bale-out package.

Democrat representatives in Congress are pushing for the package to include assistance for homeowners and also want to curb executive pay at companies that participate in the plan.

But as debate continues, the enormity of the problem confronting the US economy is worrying investors. There is also a growing fear that that bale-out package may not prevent the real economy from falling into a deep and prolonged recession.

The Dow Jones Industrial Average dropped 372.75 points or 3.27% last night to 11,015.69 points, with financial stocks sold off heavily.

Adding to the nervous state of the market was the biggest one-day jump in oil prices on record, with the price leaping $US16.37 to settle at $US120.92 a barrel. A sharp fall in the US dollar added to oil’s gains.

The Australian dollar continued its recent climb against the weakening US dollar, rising from US83c to US84c overnight.