Get ready for pain

The Australian share market looks set to take a battering today following the blocking of the US bailout plan in Congress overnight.

Dr Shane Oliver, AMP Capital Investors chief economist and head of investment strategy, said the result was “a bit of a shock”.

The vote in the US Congress against the US$700 billion bailout plan certainly stunned investors, sending the US market into a free fall.

“The vote blindsided many investors, who followed recent negotiations and believed the plan was a done deal,” reports from Shaw Stockbroking said.

In the US, the Dow suffered its largest one-day point loss ever after the announcement of the decision; the Dow fell 6.98 per cent — its largest percentage drop since the 1987 stock market crash.

The broader S&P 500 fell 8.81 per cent while the NASDAQ fell 9.14 per cent.

The House of Representatives rejected the plan, with 205 votes for the plan and 228 votes against.

But Oliver believes the bill may be passed in Congress as soon as this Wednesday, with the collapse on Wall St helping to motivate a re-vote.

US Treasury Secretary Henry Paulson said he would “continue to work with Congressional leaders to find a way forward to pass a comprehensive plan to stabilise our financial system and … [limit] the prospects of further deterioration in our economy”.

But while Oliver believes the package may eventually be passed, further changes or watering down of the package could lead to questions regarding its usefulness.

“I would suspect that it would probably get up on Wednesday with another re-vote, but it would probably be modified again, and that carries with it a degree of uncertainty that if the package is weakened, investors might be less confident that it could do the job.”

Oliver said the blocking of the package “reopens the prospect of a financial meltdown occurring”.

He said while the bailout plan was “certainly not without its faults … for the time being it was probably the best hope we have for heading off a financial meltdown”.

Oliver said the Australian market is likely to be off 300 to 400 points today. Across the Tasman, the NZX 50 had fallen by 4.25 per cent at the time of publishing.

US Treasury Secretary Henry Paulson said he is “disappointed in today’s vote”. Paulson said he would continue to work with regulators to use “all the tools available to protect our financial system and our economy”, but admitted that the tool kit available is “substantial but insufficient”.

“We’ve got much work to do. This is much too important to simply let fail,” Paulson said.