Risk aversion

Although Australian shares have rebounded today, the outlook for global growth has put the future of domestic growth under a cloud.

"The wildcard is what is economic growth is going to look like over 24 months and whether companies will be able to deliver their headline profit numbers," Mr McGlew said.

The Australian dollar dropped as low as 78.68 US cents in overnight trade as investors cast a wary glance at the outlook for commodities, amid the staggering share market movements. The Australian currency is closely associated with the resources industry, responsible for so much of the economy's growth.

Since July 1, the beginning of the financial year, the Australian dollar has lost ground against all other currencies, according to data from Bloomberg.

The Australian dollar lost 17.9% against the US dollar, in spite of that economy's woes, it gave up 16.9% against the Japanese yen, and 15.4% against the South African rand.

This morning the Australian rose to 79.5 US cents. It bought 84.57 yen, up from 83.43 yen in yesterday's session.

Slowing at home

At home, signs of the a slowing economy continue to emerge.

Manufacturing activity contracted for the fourth consecutive month in September, according to a report released today by the Australian Industry Group and PricewaterhouseCoopers, squeezed by slumping consumer demand and a slowing global economy.

The index gained 0.2 points, hitting 47.2 in September, basically flat from August when it registered 47 points, but still below 50 points, which separates expansion from contraction, where it's been since June, according to data from Bloomberg.

The weak manufacturing gauge comes one day after the release of home approvals figures showing they grew at their weakest pace in more than three years.

The monthly figure dropped 3.7% in August, worse than the 2.4% contraction in July, according to the Australian Bureau of Statistics.

Bank lending to Australian home buyers rose 0.4 percent in August from July, the slowest pace in more than 22 years, the RBA said in a report released yesterday.

Retail sales for August, also out yesterday, gained a seasonally adjusted 0.6%, less than a revised 1.6% in July.

Analysts now expect the Reserve Bank to cut interest rates by as much as 50 basis points when it meets October 7, according to a Credit Suisse Group index based on interest-rate swaps.

Within a year, the same index has priced in an interest rate of about 5.75%, compared with 7% now.

Concerns about an economy slowing too sharply figured prominently in the RBA's commentary when it cut rates from 7.25% in early September.

As a result of increases in the cash rate last year and early this year, additional rises in market interest rates and tougher credit standards, financial conditions have been quite tight," the RBA said in commentary at the time of the rate cut.

Global woes

The cliff-hanger over the US bailout has locked up the global credit markets banks, which depend on funding to write loans.

The London interbank offered rate, or Libor, that banks charge each other for such loans, climbed 431 basis points to an all-time high of 6.88% overnight, the British Bankers' Association said.

The euro interbank offered rate, or Euribor, for one-month loans jumped to a record 5.05%, the European Banking Federation said. The Libor-OIS spread, a gauge of the scarcity of cash, also increased to an all-time high.

Analysts expect the seizure of the credit markets to push more banks towards insolvency.

Hold on to quality

The stock market is going to begin to offer some value in the very near future, Argonaut's Mr McGlew predicted. Well-run companies will survive volatility and their value will become apparent.

"The stock market will ultimately look after itself," he said, noting people use it as a bellwether when a look at credit markets would be more insightful.

Companies such as BHP Billiton, Commonwealth Bank of Australia, Telstra and Wesfarmers are able to weather the difficulty both through diversification and proven management. Those companies will go on and the stocks will turn around, he said.

"I would seriously think about not selling those shares if people have gotten to those equities," he said. "It's foolish to sell quality stocks in this market."

Dow recovers

Wall Street roared back, a day after its worst sell-off in 21 years as investors bet Washington would revive a plan to stabilize the US financial sector following its surprising defeat on Monday on Capitol Hill.

Adding to the positive tone was a report that US regulators intend to provide new accounting guidelines that could slow the heavy flow of mortgage-related losses on banks' balance sheets. The Dow jumped 485 points after posting a one-day record loss of 778 points on Monday.

Strains persisted in credit markets, however, suggesting banks remain reluctant to lend to each other, and September marked the benchmark S&P 500's worst month in six years.

But investors were feeling more optimistic after President George W. Bush and congressional leaders pledged to continue talks on a $US700 billion financial-sector rescue plan.

The S&P 500 rose more than 5%, recovering more than half of the losses booked on Monday when the House of Representatives rejected the plan, which would have let the US Treasury buy bad mortgage debt from stressed banks so they can resume lending.

Tuesday's climb marked the S&P's best one-day percentage gain since July 2002.

''The president's saying that they'll get something passed this week has definitely calmed nerves,'' said Marc Pado, market strategist at Cantor Fitzgerald & Co in San Francisco.

''And if a bill doesn't pass, a change in accounting rules might be enough to break the lock in credit markets,'' he added. ''It won't support us forever, but it will buy time and break the stranglehold on the banks.''

Under current rules, banks must value assets based on what they would fetch in a current market transaction. Since prices for mortgage-related assets have long been at distressed levels, banks have been forced to scurry for more capital.

The Dow Jones industrial average rallied 485.21 points, or 4.68%, to 10,850.66. The Standard & Poor's 500 Index jumped 58.35 points, or 5.27%, to 1164.74. The Nasdaq Composite Index climbed 98.60 points, or 4.97%, to 2082.33.

For the month of September, the Dow fell 6% - its worst month since June. Tuesday also marked the end of the third quarter, when the Dow fell 4.4%. This was the Dow's worst quarter since the second quarter of this year.

This is the Dow's longest quarterly losing streak since 1977-1978.

The S&P 500 lost 9.1% in September, its worst month since September 2002. For the third quarter, the S&P 500 finished with a 9% loss. This was the S&P 500's worst quarter since the first quarter of 2008.

This is the S&P's longest quarterly loss streak since 2000-2001.

The Nasdaq sank 12.1% in September - its worst month since September 2001, when the September 11 attacks on the United States occurred. For the third quarter, the Nasdaq dropped 9.2%. This was the worst quarter for the Nasdaq since the first quarter of this year.

On Tuesday, investors snapped up beaten-down shares across the board, with financial and technology companies among the standouts. Apple contributed the most to the Nasdaq's advance, a day after the iPod's maker led the index to its worst day since the bursting of the Internet bubble in April 2000.

Among financials, JPMorgan shares rose 14% to $US46.70, making the stock a top boost to the Dow. Shares of Citigroup climbed 15.6% to $US20.51.

It is not unusual for big sell-offs like Monday's to be followed by a short-term relief rally, Mary Ann Bartels, chief US market analyst at Merrill Lynch, wrote in a note to clients. Of the eight times the S&P fell by at least 8.79%, a next-day rally occurred six times, she said.

Between July and September, though, the S&P 500 index posted its worst quarter since the third quarter of 2002 and its biggest monthly drop since September of the same year.

What happens next in Washington, investors said, would be instrumental in providing direction for the broader market.

''I am worried that if there is no plan, then the credit squeeze will get worse and it will be like a boa constrictor has got the economy and just keeps squeezing,'' said Al Kugel, chief investment strategist at Atlantic Trust in Chicago.

The bailout plan's surprising defeat rattled markets around the globe, with Asian stocks following Wall Street's Monday slide overnight. European shares recovered after Bush's remarks and on data showing improvement in US consumer confidence.

Shares of Apple, a tech bellwether, rose 8% to $US113.66 on Nasdaq. Shares of Intel climbed 8.5% to $US18.73 after Piper Jaffray, a brokerage, raised its recommendation on the chip maker's stock.

In economic news, the S&P/Case-Shiller Home Price Index showed further deterioration in housing, with prices of US single-family homes plunging a record 16.3% in July.

But both the September Chicago PMI, a measure of manufacturing activity in the US Midwest, and the Conference Board's reading on consumer confidence in September, were stronger than expected, tempering concern about the economy.

About 1.62 billion shares changed hands on the New York Stock Exchange, below last year's estimated daily average of roughly 1.90 billion. On Nasdaq, about 2.37 billion shares traded, well above last year's daily average of 2.17 billion.

Advancing stocks outnumbered declining ones on the NYSE by about 4 to 1. On the Nasdaq, advancers beat decliners by nearly 2 to 1.

- with Reuters