The Australian sharemarket reversed a solid opening rally after the Reserve Bank minutes dashed rate cut hopes and Treasurer Joe Hockey revealed a sharp deterioration in the Federal budget and projected deficits for the next decade.
Following the rally on Wall Street last night the S&P/ASX 200 index jumped 0.8 per cent at the open, but it dropped into the red and closed 13.6 points, or 0.27 per cent, up at 5103.2 points as Mr Hockey forecast a “significant blowout” in the 2013/2014 deficit $47 billion from the $30 billion expected in August and just $18 billion in May.
Sentiment was hit after Mr Hockey revealed deep spending cuts in next year’s budget that could steepen the slowdown in growth to below the forecast 2.5 per cent.
The Australian dollar, however, held steady at US89.40¢ and government 10-year yields were also flat at 4.227 per cent despite the forecast surge in government borrowing from $300 billion to a peak of $US460 billion by 2017.
Westpac chief economist Bill Evans said the commentary in the Reserve minutes was certainly “markedly upbeat about housing” and supports his changed view that no early rate cut could be expected.
“The minutes are also consistent with our expectation that the Bank would prefer to provide further stimulus through jawboning down the currency,” he said.
“Of more concern to us is the Board’s assessment around tentative signs of a stabilisation in the labour market and a more positive assessment around household consumption.
“We remain unconvinced about these tentative signs and believe that the drag from businesses’ resistance to investing and employing will eventually highlight the need for further cuts.”
Overnight the US Empire State manufacturing index improved but fell short of forecasts, supporting US stocks as it trimmed expectations the US Federal Reserve would decide to taper its bond purchasing program during its meeting that begins tonight.
Although credit markets continue to price in a high risk the Fed would soon start to scale back its stimulus, analysts said stocks are rising on the belief US growth is strong to withstand higher borrowing costs.
Last minute a strong performance from German manufacturing saw the eurozone manufacturing PMI rise to 52.7 from 51.6, its highest level since mid-2011, but the regional services PMI slipped to 51 from 51.2 points.
The Shanghai composite index was off 0.6 per cent at the close of the ASX as the economic policy conference ended without the announcement of a growth target. Forecasts are for an unchanged 7.5 per cent, but economists fear it could be lower of the government believes it is necessary to accelerate growth reform away from infrastructure towards consumption.
In Tokyo the Nikkei index was up 0.7 per cent.
Gold rose $US8 to $US1242 an ounce, copper lost 0.3 per cent to $US7270 a tonne and spot iron ore fell 1.1 per cent to $US134.90 a tonne yesterday.
Bell Direct equities analyst Julia Lee said investors sold off banking, materials and energy stocks as the government raised the possibility of potential tax hikes next year.
"The Australian market gave up just about all of its earlier gains,” Ms Lee said.
"Today’s budget update suggests in May we’ll be watching to see whether we do see steep spending cuts and potential higher taxes."
The 2013/14 federal budget deficit has risen to $47 billion, from a $30 billion deficit forecast just before the September election, according to the Mid Year Economic and Fiscal Outlook (MYEFO).
Defensive stocks did well, with the telcos, consumer staples and health care stocks finishing in positive territory.
It came after US and European stocks received a boost overnight from stronger US industrial output figures.
Investors will be watching the Federal Open Market Committee meeting to see if the Fed will begin to taper its stimulus program.
Among the big four banks, Westpac had gained 10 cents to $31.87, ANZ put on 19 cents to $30.48, National Australia Bank increased 20 cents to $33.40 and Commonwealth Bank was up 30 cents to $73.93.In the resources sector, global miner BHP Billiton was flat at $35.66, Rio Tinto was up 39 cents to $65.30 and Fortescue Metals had lifted 17 cents to $5.52.
Telstra shares were four cents higher at $5.02 while Wesfarmers shares were $1.05 higher at $42.56.
Shares in REA Group dropped $2.79, or 6.9 per cent, after the online real estate advertising business announced its chief executive, Greg Ellis, would leave the company to take up an overseas appointment.
The broader All Ordinaries index was up 13.0 points, or 0.26 per cent, at 5106.1.
The December share price index futures contract was flat at 5101, with 108,978 contracts traded.
National turnover was 1.4 billion securities worth $3.7 billion.