Economy

Soft April home values and expectations of lower interest rates point to a further improvement in housing affordability

Wed, 02 May 2012 00:41:00 GMT

Rismark Home Value Index Release

Capital city dwelling values were down -0.8% in the month of April following the stability witnessed over the first quarter of 2012, leaving national home values down -0.7% year to date.

Property values across the combined capital cities of Australia showed renewed softness in the latter half of April with dwelling values falling by -0.8 per cent after a stable first quarter. Over the three months ending April 30 the RP Data-Rismark Index has seen values rise by 0.3 per cent. On a year to date basis, dwelling values are now down -0.7 per cent.

Values were down across five of the eight capital cities over the month of April, with Hobart (-2.9%), Melbourne (-1.7%) and Brisbane (-1.3%) recording the largest falls. On a 12 month basis capital city dwelling values have fallen by -4.5 per cent with the weak conditions in Melbourne (-7.0%) and Brisbane (-6.4%) dragging the weighted average down.

RP Data's research director Tim Lawless said that the housing market gains seen throughout February and March, which delivered a flat first quarter result, have now been mostly offset by the -0.8 per cent fall over the month of April.

"Our estimate of transaction volumes to February suggest that the two interest rate cuts in November and December last year are yet to provide a sustained stimulus to the market, with transaction volumes remaining reasonably steady at around 31,000 sales each month. Comparing this with the sales rate through mid 2009 when around 45,000 homes were selling each month, the slowdown in buyer activity becomes quite clear," he said.

Rismark's Managing Director, Ben Skilbeck, added, "The stability seen in the first quarter continued though mid April before the market declined in the last two weeks of the month. This decline coincided with the considerable interest rate uncertainty introduced by the ANZ Bank increasing its interest rates and the anticipation of the first quarter inflation figures. With inflation figures now behind us, if the Reserve Bank does cut interest rates today and then again in June, as is highly anticipated by the financial markets, home buyers will benefit from considerable affordability gains and the housing market is likely to see improved conditions building off the stability evident in the first quarter."

According to Tim Lawless, segmenting the housing market performance by price point shows the premium housing market remains the weakest across broad price brackets. The most expensive 20 per cent of suburbs across the capital cities have seen dwelling values fall by 5.7 per cent over the twelve months to March this year while the most affordable twenty per cent of suburbs have seen values decline by 2.3 per cent. This trend is most evident across Sydney, Melbourne and Perth where the premium housing markets are most established.

While April saw values reduce across most capital cities, rents continued to show modest improvements. At the combined capital city level, the weekly rent on a detached house is up by 4.1 per cent over the year to April and unit rents are up by 3.7 per cent,” Mr Lawless said.

Growth in rents has been varied across the country with the largest increases in Perth where weekly rents have surged by more than 14 per cent over the year. Smaller rental increases were recorded across Sydney, Brisbane, Darwin and Canberra. Rents in Melbourne and Adelaide were reasonably flat while Hobart rents went backwards by 3.9 per cent over the year.

Higher rents and lower home values are contributing to higher rental yields. The average capital city house is now returning a gross yield of 4.2 per cent, up from a low of 3.6 per cent just over a year ago. Units, which typically provide a higher rental return, are providing a gross yield of 4.9 per cent, up from a low of 4.4 per cent.

Source: RP Data

Lenders cut fixed rates

Tue, 24 Apr 2012 00:09:00 GMT

Less than 24 hours after Citibank announced it would cut the interest on its three year fixed rate to 6.25% and a free rate lock for 60 Days.

Citibank are also still offering 85% No LMI for purchases and Refinances.More lenders have slashed the interest on their suite of fixed rate products. St George slashed the interest on its one, two and three year fixed rate products. Effective for a limited time only, St George is offering new or existing customers the chance to lock in their mortgage for one, two or three years at 5.99 per cent.

In the current environment, more people are looking for the certainty that a fixed rate mortgage provides, however, many people want flexibility as well as a great rate. St George customers can choose to fix their entire home loan rate at 5.99 per cent p.a. or split their home loan between fixed and variable rates. This way, they can take advantage of both the 5.99 per cent p.a. offer and their highly competitive variable rates.

In addition, until 31 May, St George is offering discounts of up to 0.8 per cent p.a. off new Standard Variable Rate Home Loans and new Portfolio Loans for total borrowings over $500,000 under the Advantage Package.

St George is also offering new customers $700 towards switching costs on selected new home loans under Advantage Package, if they switch their home loan of $250,000 or more from another financial institution.

With greater competition in the lending market, home buyers now have more choice and flexibility than ever before making it the perfect time to make the break from their current lender.

BANKS CAN CUT RATES IN APRIL

Tue, 17 Apr 2012 01:10:00 GMT

The big four banks are capable of cutting interest rates on loans in April while protecting their profits thanks to lower funding costs.

There is a case for a cut this time around, if anything, the funding cost issue is slowly going away. But analysts say banks are more likely to hold interest rates steady, and that a repeat of February's interest rate rises, made independently of the Reserve Bank of Australia, is off the agenda.

Their comments follow a Commonwealth Bank briefing on Monday about its transfer pricing curve which is used to price loans based on funding costs. The bank now has room to lower those prices and enable rate cuts, but is in no hurry to do so. A thaw in offshore wholesale debt markets since January is estimated to have lowered banks' funding costs by about 80 basis points. Yields demanded by bond investors have dropped, meaning banks face just a one to two basis point headwind on their profit margins a year.

Banks can argue for out-of-cycle rate rises - made independently of the RBA - of just 5 to 10 basis points in the next 12 months depending on deposit rates. So there is less of a case for out-of-cycle rate increases now than there was when they made that decision in February. Banks are more likely to sit on their hands for three months and monitor movements in credit markets, deposit flows and the RBA's position.

If the RBA holds the cash rate steady, banks will follow, but an RBA rate cut will make banks' position tougher. Although banks should, in theory, pass on the entire benefit to their customers, there are some residual costs that they will have to absorb and their margins will be under pressure.

CBA chief executive Ian Narev in February said higher funding costs meant the bank was writing new mortgages at a loss, which had occurred for a brief period in January. But the big four still continue to take a 20 per cent return on capital invested - a measure of profit - from mortgages, and this could rise to 30 per cent if funding costs returned to 2011 levels, he said.

Will the RBA make us all winners on Cup Day?

Wed, 26 Oct 2011 10:05:00 GMT

Annual headline inflation is now 3.5%yr but at 2.5%yr, the average annual underlying inflation rate is at the mid-point of the RBA's 2 to 3% target band.

The ABS have made, revisions relating to changes in seasonal adjustment and the result has seen the Q3 inflation report clearly change the inflation story. The ABS past estimates had been overstating Australia's inflation position. The Reserve Bank will welcome this outcome. The RBA Board Minutes for August forecast annual core inflation to print 3.25% for both 2011 and 2012. The ABS’s reversions have handed the RBA with actual core inflation of 2.47% for the year to September 2011 with a benign fourth quarter estimate of around 0.5%qtr reasonable given the slowdown in the economy. That will allow the Bank to lower its inflation forecast for 2011 to 2.25% with a similar outcome likely in 2012.

Given the Governor's recent statement that “an improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary”; it now seems a good bet that we will see a rate cut by the end of 2011. In fact, given the RBA's previous record of moving rates every November for the last five years, and given the mounting case for a rate cut, we would say that the best each way bet on Cup Day will be that the RBA will make all Aussie’s winners with a 0.25% rate cut. It may just be the RBA that stops the nation just before the horses bolt at Flemington.

11 – 0: The RBA Keeps Rates on Hold for the Eleventh Straight Month.

Wed, 26 Oct 2011 10:03:00 GMT

The RBA kept rates on hold, again, as expected in October, but is progressively becoming more dovish in tone. The RBA has now hinted at the possibility of cutting rates if needed.

The extreme volatility in financial markets driven by the sovereign debt crisis in Europe and the heightened downside risks to global growth remained at the RBA’s primary concern. However, The RBA has maintained its upbeat assessment on Asia, noting that growth in emerging Asia “remained solid, although slower than in 2010”. It was noted that investment and consumption in China had softened a little with the availability of finance to certain industries being quite tight, but that the broader economy was still growing at a robust pace and that exports were still growing to advanced economies.

Domestically, the RBA continues to expect the terms of trade to have risen further in the September quarter to another record high. It is widely expected that underlying inflation in Q3 (released 26 October) to come in at 0.6%, which would take the annual rate to 2.6% and likely to remain within the RBA’s comfort zone.

However, financial market sentiment should improve throughout October amid hopes that European leaders can unveil a comprehensive strategy to address their crisis. In addition, recent domestic demand partial indicators have improved – including retail sales, building approvals and employment data all suggest that domestic economic activity is holding up relatively well. Further, consumer and business confidence have partially recovered after sustaining heavy falls in August.

Although there are hopes for a rate cut in November, the consensus is for rates to remain on hold.

Australian Market Wrap #276 - KEN HOWARD, RBS MORGANS

Mon, 10 Oct 2011 02:14:00 GMT

Today was not a great start to the final quarter of the year and it certainly adds a bit more powder to the theory that last week's rally was really just a short covering rally. Obviously the sell-off in the US was the lead for the Australian market, but it still remains all about Europe and the European sovereign debt issues with across-the-board selling, from commodities stocks to the big banks, a fairly nervous day today to start the quarter.

A public holiday in most states kept volumes down, but the direction for the market was reasonably clear all day and that was that we're heading into negative territory. When volumes are down you tend to get exaggerated moves on individual stocks so you need to be cautious when interrupting movements. But today we witnessed broad-based selling across the market; the direction would've been any different if all market had been open.

The financial sector was down 3 per cent, driven by rumours that the French banks will need to recapitalise, and such negative sentiment rubs off on all major global banks which will result in weak share prices, but the outlook for the Australian economy’s still robust so expecting our major banks to hold their dividends, which should give them a bit more support.

In company news Elders has announced the sale of its forestry assets and grain trading business. The forestry assets are booked in at $500M, but looking at the price that Gunns recently sold its forestry assets for, Elders will probably looking at achieving a price of $250 - $300 million, a 40 - 50 discount.

Elders will at least have the cash to strengthen their balance sheet. The forestry business is a cash drain, your crop comes in once every 10 years. So strategically, it’s probably the right move for Elders.

The Volatility of the Australian Dollar - BORIS SCHLOSSBERG, DIRECTOR OF GLOBAL RESEARCH & ANALYSIS, GFT

Mon, 10 Oct 2011 02:08:00 GMT

The Aussie dollar was rising against the US dollar, riding high on commodities, but with global equity markets in retreat we are seeing the dollar fall back below parity. The Aussie dollar has always had a strong correlation to the rise and fall of global markets.

The market is also getting nervous with the China story. The fear is that the Chinese economy is heading for a hard landing and with Australia’s growth so heavily tied into to China the Aussie dollar is suffering.

Where once China was viewed as the locomotive of the world economy, we are starting to see some slow down, and the debt crisis in Europe and the US may also be hitting China, whom may be holding some very low quality European and US bonds.

The biggest problem with very large sovereign debts is the ability to repay the debt. Japan for instance held large debts for many years and keep spending to face off a recession so they were never able to repaid the debt, the result was the economy just plodded along at very low growth, and growth is what is required to repay the debt.

In the meantime, it’s no surprise that Greece is saying it can’t meet its financial deficit targets this year or next year. While in the background, Germany’s Angela Merkel’s secret plan, Project Eureka, is seeking to lump all the Greek assets together and privatising them. The plan will benefit Greece by reducing their debts by half, and then at the same time also investing about 50 billion Euros into Greece in order to stimulate growth.

Overall, Project Eureka seems to make a lot of sense economically however there may not be the political will to implement Angela’s plan, which requires the agreement of all the European member nations which are harbouring resentment now against Greece.

Australian Market Wrap #260 - MARTIN LAKOS, MACQUARIE PRIVATE WEALTH

Mon, 10 Oct 2011 02:07:00 GMT

The energy sector and the big miners helped the local market higher today, on the back of ongoing rebounds in markets all around the world. Last night the European markets were up between four and five per cent. It does look like policymakers are starting to get it, that they need to be getting some action going.

Tim Geithner, the US Treasury secretary, comments that the European governments are starting to head in the right direction saw markets continue to rally from pretty oversold positions and probably a good portion of that rally is short-covering. The US market was up nearly 320-odd points at one stage, closing up 146 points on the back of slightly disappointing consumer confidence numbers.

The disappointment was Shanghai and Hong Kong markets down about one per cent with concerns that the recent monetary policy tightening in China and credit growth tightening is actually starting to seriously impact property prices and property sale volumes.

In company news, Wesfarmers have sold their Premier Coal mine in Collie, WA for about $296 million, posting a $90 million pre-tax profit. Westfarmers still have two other key coal assets, being Bangla and obviously Curragh, and combined will produce about eight million tonnes of coal. The sale of Premier doesn’t see Westfarmers exiting the industry altogether but it does raise the question why are they selling? It may well be that they're seeing peak prices and they can get a good sale price.

The ACCC have given the green light to SABMiller’s takeover of Foster's as expected. The ACCC made it well known that they did a fairly intensive search, speaking to suppliers, competing breweries, the retail sectors that sells brewing products. They see no change in the competitive environment.

Uranium miner Paladin Energy has come in with a $70 million institutional capital rising. The pricing is being set by a book build based on a - roughly a 10 per cent discount to the previous closing price, which was $1.31. The share price has been in almost a consistent free fall losing almost 80% this year. Paladin has noted the capital raising is to support the balance sheet. They're seeing some cost blowouts in one of their projects, and clearly they're wanting to make sure the balance sheet is in good shape ahead of a maturity of some US converting bonds that take place in March, 2013.

Australian Market Wrap - #123 KEN HOWARD, RBS MORGANS

Tue, 11 Oct 2011 01:46:00 GMT

It has been a relentless run of negative days on our market. It's good to see the market up over 3 per cent today with the banks and miners leading the charge.

We've got to remember that nobody is going to ring the bell when you hit the bottom, and at some point you do have to start averaging into the market. There's a lot of value out there, but with those European issues yet to be resolved so we're still waiting for some guidance there.

Short-selling has certainly been a feature of the share market since the GFC, and a feature of the market in the last couple of months, we've seen some of the biggest names in the top 50 gapping down, 3, 4, 5 per cent in a day. The rally today has seen some of those stocks reversing that trend.

Today we saw likes of Iluka up over 10 per cent. Macquarie Bank was up the best part of 10 per cent. Incitec Pivot was up 9 per cent. Such large swings always points to a bit of short-covering going on in the market.

Even some of those stocks outside the top 50: Lynas Corporation is a good example - it's a $2 billion company, up 30 per cent today. So there certainly has to be a degree of short-covering that's driven today's rally, as well as longer term investors looking for value.

In today's market there was a switch out of the defensives into the growth stock. Most of the defensive stocks had a fairly lacklustre day, Woolworths, Telstra, AGL, Macquarie Airports were lucky to be up half a percent.

Goodman Fielder is set to raise as much as $259 million in new capital with a fully underwritten rights issue. I'm sure it's very disappointing for the suffering shareholders of Goodman Fielder that they need to stick their hands in their pocket one more time to try to see this company turn its prospects around.

If they do sell a couple of billion dollars worth of bread and butter, it should be a defensive business, but that hasn't been its track record. With a new CEO, looking at a re-structure, and also looking at having to refinance $500 million next year, is obviously opting to raise some capital earlier, rather than later.

Australian Market Wrap #321 - DOUG GRANT, BELL POTTER

Tue, 11 Oct 2011 01:47:00 GMT

The market is still reacting to the eurozone crisis. IMF annual meeting over the actual weekend, and comments by both Timothy Geithner, the US Treasury secretary, that if the eurozone didn't act, there was going to be a cascade of defaults, and Larry Summers, who was Obama's chief financial adviser, comments that this is the gravest he has seen for 20 years.

The resources sector was at the forefront of the selling since Thursday, and today, we saw no let-up whatsoever, and in fact most MCAP over resources were down anywhere between 8% to 15%.

In part this selling has come about since the FOMC which has raised concern by stating that there were further risks to the economy.

The gold sector has seen a big drop primarily driven by people actually liquidating their positions and speculators being forced out. It appears that for these people who are actually liquidating their positions it's more than likely to pay for losses elsewhere within their portfolio.

In company news, Arrow Energy has upped its bid for Bow Energy which has been recommended by the Bow board. The deal now needs a large major player to take it to the actual next level and Arrow feels that they can get a 15% uplift in production.

MARC FABER, EDITOR AND PUBLISHER OF THE GLOOM, BOOM & DOOM REPORT

Tue, 11 Oct 2011 01:47:00 GMT

One of the more provocative experts on global markets is Dr Marc Faber, a former managing director of Drexel Burnham Lambert, but for two decades now he's been an investment adviser, fund manager and broker dealer, and he's also the editor and publisher of the Gloom, Boom & Doom Report.

Marc Faber has been for years highly critical of Federal Reserve policies of Alan Greenspan and Ben Bernanke for printing money, but the US$400 billion in Operation Twist, the latest plan by Ben Bernanke to avert a crisis is exactly the right thing.

Mr Bernanke didn't increase the balance sheet of the Federal Reserve, his just shifting maturities from holdings short-term to long-term assets, in other words long-term Treasury bonds. The problem with this policy is that when the time comes, in the future be it 3 months or 3 years, the Fed will have to increase interest rates. This policy will make increasing interest rates very difficult as the Feb will lose a lot of money on their long-term bond positions as a result of any rate increase.

This policy is unlikely to make mortgage rates more attractive. If you look at the interest rate movements over the last few years, specifically after September 2007 when they began to slash interest rates from 5.25% on the Fed fund rate to near zero, the lower interest rates haven't helped the economy at all.

The near zero rates have helped the financial sector, especially the banks, but it hasn't helped the man on Main Street. Near zero interest rates has not expanded the Fed's balance sheet, which strengths the US dollar with less pressure from the commodities on prices.

In 2008, most banks in the Western world holding subprime loans went bankrupt. Their Government’s came out and bailed them out by provided liquidity to the banking system. Now these banks are holding and trading in Greek bonds, Portuguese bonds, indexed futures and so forth which are triggering bank downgradings on both sides of the Atlantic and Incredible volatility in the markets.

The best would be for the Greeks to default and leave the EU. A default would require a restructure of these loans whereby everybody whose leant money to Greece, over 400 Billion Euros, will have to take a loss. The virtue of a market economy is that countries and companies that are badly-run and over-leveraged, go bankrupt and then the system is purged, otherwise, you never clean the system.

We are in the beginnings of a bear market. Stock market around the world didn’t get hit this hard just because of Greece. The stock markets are severely discounting globally on the back of disappointing corporate profits in the United States and in Europe and a meaningful slowdown in China.

If you define a bubble as a period during which you have excessive credit growth and artificially low interest rates, for sure, we have a gigantic bubble in China. China isn’t finished, but we will see a meaningful setback. Australian growth today depends entirely on China, not just a little bit. If China has a recession, and the price of copper would suggest that this is happening, then obviously Australia will be hit very hard, especially the Australian dollar.

We also have big problems coming towards us from the Middle East. The so called ‘Arab Spring’ social uprising where regime change occurs and the new regimes are far less friendly towards Western countries, including Australia. The Middle East will go up in flames and that will have an impact obviously on oil prices and on the valuation of financial assets.

It’s certainly difficult to know how the world will look like in 5 or 10 years' time. The best strategy to protect your wealth is to prepare because we're all doomed! We have to prepare our assets in such a way to diversify in relatively uncorrelated assets. Let’s say you own, 25 per cent of your assets in real estate, 25 per cent in gold, 25 per cent in equities and 25 per cent in cash, this combination you give you the flexibility to respond accordingly.

Australian Market Wrap #124 - MARTIN LAKOS, MACQUARIE PRIVATE WEALTH

Tue, 11 Oct 2011 01:48:00 GMT

The Italian and more generally European markets moving ahead last night provided a relief us with the retailing sectors helping to lift the local share market today.

Market participants are definitely having to juggle a whole range of news headlines in the last 24 - 48 hours that have really been moving markets around.

We had that ratings downgrade by S&P on Italy and yet we had all European markets, including the Italian market, up overnight so it is quite difficult to get a good read. There is also quite a lot of news coming through this week.

Tonight we'll have the announcement from the Federal Reserve on their two-day meeting. Clearly markets are looking for some more action out of the Federal Reserve, largely a program of buying long-dated treasuries, which will push rates lower, again at that long end. The hope is that this policy decision will have an impact on mortgage rates and start to see an improvement in both housing and consumer discretionary spending in the United States.

Also some further news out of Greece overnight that it does appears that the Troika, which is the EU, the European Central Bank and IMF, are getting a little more comfortable with the actions taken by Greece.

And lastly, we had obviously the IMF come through with growth numbers yesterday and certainly showing that China remains in pretty good shape.

In company news, David Jones result came in almost in line with expectations at $168, but they did note that the environment remains pretty tough. David Jones will payout a dividend of 15 cents, that’s 3 cents down on the previous corresponding period, but still a reasonable payout of about 85% and there's no doubt the cost of doing business is coming down as the board really focuses on their costs.

Interestingly, with that, the whole consumer discretionary sector performed quite well. David Jones itself was up a couple of per cent, we had good performances by Harvey Norman, Myer and Echo Entertainment, the new casino business spun off from Tabcorp.

Atlas Iron has succeeded in its takeover of FerrAus. The share price actually closed down 10 cents for Atlas Iron. This is quite an important acquisition Atlas who are going to spend all up about just under $250 million to acquire FerrAus. It gives them both an increase in reserves, FerrAus has got resources of nearly 480 million tonnes of iron ore, but it also gives them an additional exposure and effectively control of the Western Iron alliance in the Pilbara at Port Hedland which is quite interesting for future expansion plans for Atlas Iron.

On the broader market, volumes are really down. For September alone we've seen average volumes under about $4.4Bn down from normal volumes of $5Bn - $6Bn.

Certainly with the market volatility, there doesn't appear to be a lot of conviction at this stage, either from buyers or sellers. So, we're not getting sold down heavily on volume; equally so, buyers are sitting on their hands.

European Market Wrap #223 - LOUISE COOPER, BGC PARTNERS

Tue, 11 Oct 2011 01:49:00 GMT

The markets open down, on the back of Italian credit downgrade but didn't stay down and now we've had a little bit of a rally. We knew that the Italian debt situation is not great.

We've known for some time that Prime Minister Berlusconi is not keen on austerity measures, a man more interested in other things; so, none of this is new news.

Clearly there is a significant euro zone debt crisis, and quite clearly we're not getting much help from the euro zone political leaders. What is interesting is we're getting far more help from central banks and all the various measures they're taking, than anything being put in place by those who have been elected to deal with this crisis.

The decision earlier in the week by the five central banks - Fed (USA), European Central Bank, Bank of England, Bank of Japan and Bank of Switzerland holding joint auctions, unlimited dollars between now and Christmas.

The Central Banks were worried that European banks were having difficulty borrowing money in dollars, so they've come out with their sort of emergency stop-gap to help them. The interest rates they're charging are quite high, and actually if you look at the wholesale markets, credit is truly crunched.

Today the Financial Times reported that the German giant engineering firm Siemens had chosen to withdraw €500 million of lending from a big French bank. This highlights that there's an awful lot of institutions out there, companies, money market funds in the US, who prefer to put their money with the European Central Bank, which is very, very safe, rather than necessarily lending it to any French or German banks or any bank they perceive as being risky. So the wholesale markets are still very much crunched.

On all the European markets equities are looking cheap with single digit PEs for the FTSE, CAC and DAX just with good dividend yields. Unfortunately the level of fear is so much that no one is coming in to fill their boots.

The outlook is just so uncertain, no one knows where they are we going with the eurozone and that’s the very big question all investors are seeking answer on. Due to this massive uncertainty, nobody seems to be willing to take any big bets, so it is very, very clear that all bets are off.

We've already seen US investors withdraw $75 Billion from equity investments over the last four months, which is a really large number and highlights how individual investors, get terribly nervous with volatility. Equity markets worldwide have been hugely volatile in the last few months.

Much of the volatility in the euro zone centres on Greece and the likelihood of default. The problem is we don't know when it will happen and we don't know if anybody's creating a backup plan to limit the explosion, limit the contagion when Greece does default.

If markets felt confident that our politicians were working on a way to minimise the stresses in the system when Greece defaults, investors would have some confidence to trade.

The trouble is nobody really has any level of confidence in what our leaders are doing.

Standard & Poors Downgrade Italy's Credit Rating

Tue, 11 Oct 2011 01:50:00 GMT

It never ends; debt concerns flared up again as Europe's third biggest economy, Italy, became the latest credit ratings target. Standard & Poor’s downgraded the Mediterranean nation, one notch from AA to A triggering the predictable sell-off on most markets and it was shades of 2008 amid signs of growing mistrust of Europe's banks.

“What it shows is that the stresses in the European debt crisis are now starting to spread to the larger economies” (Mathew Sherwood - Perpetual Investments).

“The market is saying Italy's broke and that sentiment can make Italy broke” (Gerard Minack - Morgan Stanley).

The Australian share market lost another 1 per cent today due to fears Europe's mess would trigger a global recession which would be bad news for Australia's resources trade.

“Certainly there is selling of some of the key commodities, which is obviously again putting pressure on the Aussie dollar. So we may well be seeing parity or below in coming days” (Sean Callow - Westpac Currency Strategist).

Falls in commodity prices didn't help shares either, however there is also the view that the sell-off in Australian and International Equities, is also about their value. What we are seeing is that “as leverage is reduced in the global investment system, equities going back to closer to fair value. They may end up being cheap, but to get really cheap levels, you've probably got to see another 20 per cent or 30 per cent downside in my view” (Gerard Minack).

The Australian dollar fluctuated wildly against the US currency, dropping below 102 US cents at one stage. Then it firmed briefly after the Reserve Bank's September board minutes were released. It reinforced the view that the debt crisis is weighing more heavily on interest rate decisions, but the bank says it's well placed to move rates up or down if necessary.

The RBA seems to be hedging its bet. It is concerned about the short-term outlook on the basis of Europe and its flow-on effects around the whole global economy, but in the medium term it's still concerned about the inflation being too high in Australia.

Meanwhile mistrust is also growing, with reports that the Bank of China has stopped doing certain business with some European banks. There has also been talk that overnight of big industrial companies withdrawing deposits from French banks and giving it to the European Central Bank. There are also stories of foreign banks not willing to take on Italian and French banks as counter-parties.

Uncertainty remains the only certainty.

Market Wrap #45 - DOUG GRANT, BELL POTTER

Tue, 11 Oct 2011 03:14:00 GMT

The local market was hit again by a lack of confidence as hopes of solving the European debt crisis faded. The fear of a Greek default took hold again over the weekend and the there was no escaping it on the local market.

It seems to be déjà vu all over again.

European debt and Greek default has been the major theme now really for the last three to four weeks, and it seems to be that we get some good news out late in the week, and then that's all undone over the weekend.

This weekend we witnessed a meeting of the European finance ministers which yielded no real positive developments whatsoever. Timothy Geithner, the US Treasury Secretary, attended, and when he asked if they can increase monetary stimulus, he was flatly denied.

The European finance ministers then came out to say that they may well withhold the bailout funds for Greece through October, unless Greece was to meet the deficit reduction targets.

This announcement forced the PM of Greece to cancel his meetings in the US, to hold an emergency cabinet meeting, and at the present moment they're obviously still talking about further austerity measures.

The policy setters at the US Federal Reserve are unusually hold a two day FOMC meeting, to have further time to discuss the potential costs and benefits of further monetary stimulus and monetary policy settings.

The market is expecting the announcement of ‘Operation Twist’, which is a throwback to something that happened in the 1960s, whereby the Federal Reserve will rotate its holdings from short-term treasuries into long-term treasuries, thereby flattening the yield curve and lowering interest rates further hence obviously lowering borrowing costs.

On our local market today’s sell-off was very widespread except for gold stocks and defensives like Telstra and MAP. The banks, again, were worst hit along with some of the wealth managers.

Market Wrap #56 - KEN HOWARD, RBS MORGANS

Tue, 11 Oct 2011 03:28:00 GMT

Today was a bit like groundhog day.

The market opened with a strong start and then about 11 o'clock it all started to turn back down, a bit like yesterday. But also like yesterday, there was a strong correlation between the movements in the Australian share market and the Australian dollar, which finished down about a cent today.

So the theme at our end still seems to be money being repatriated overseas. Australian shares are being sold and the money's heading back to Europe or heading back to the United States.

I guess it's a bit much for Australian investors to think that with the German share market off about 20 per cent in the last four weeks that German investors wouldn't also be looking to sell their Australian equities, an ongoing liquidity theme of money heading back to Europe.

Nevertheless gains quite substantial today. There are only two notable stock that were down, Newcrest and Suncorp, and they were only down marginally. The energy sector was the strongest, but pretty much everything in the top 50 was up today.

There is still plenty of commentators who are nervous about the outlook for the global economy, nervous about the outlook for the Australian economy. However the big miners don't seem to be terribly nervous.

Rio Tinto announcing another $830 million to go into the Pilbara, $500 million of which is going into power generation. A significant ongoing commitment by big miners into those big infrastructure projects and obviously they have a much more optimistic view, long-term view for the global economy.

Macquarie Airports has received the green light from European regulators for its asset swap deal. Once this deal goes through, there'll be about 80 cents of cash per share inside Macquarie Airports, which is about $1.5 billion in cash. The directors of Macquarie Airports have certainly been hinting that that money will find its way back to shareholders, a significant return of capital considering the current share price is about $3.20.

This deal also means that Macquarie Airports will be a cleaner vehicle once all this goes through. It'll simply own a single asset, being 85 per cent of Sydney Airport, which is obviously a very good piece of infrastructure in Australia.

European Market Wrap - JAMES SHUGG, SENIOR ECONOMIST, WESTPAC

Tue, 11 Oct 2011 03:11:00 GMT

Now, we've got two French bank downgrades thanks to Greek exposure, but because we've got the leaders Sarkozy and Merkel cooing that Greece is still going to be part of the Euro, the market seemed to think that was alright.

Merkel and Sarkozy are both excellent at telling markets what they want to hear rather than telling them what's really going to happen.

They're not saying that Greece won't default, they're not saying there won't be an orderly debt restructure of Greece at some future point, which absolutely has to happen as there is no other solution to this problem without a significant amount of debt owed by Greece, and probably Portugal and Ireland, being written off, with creditors wearing significant pain with flow-on negative impacts for the banking sector in Europe and probable recession in Europe.

Credit default swaps have almost fully priced in a likely default by Greece. The yields on Greek government securities imply that markets are fully pricing in a Greek default, equity markets have yet to fully done so.

A Greek default will involve probably the banks in France and Germany having to be partly nationalised, but certainly bailed out by their governments and that sort of news will bring around another whole round of selling in the equity markets.

The leader in The Economist tomorrow is saying, "The situation is so grave, so menacing, so unstoppable has the crisis in the Euro become that even rescue talks only fuel ever-rising panic, and unless Germany rises to the challenge, disaster looms."

Ultimately Germany will be forced to rise to the challenge, recognising that if they don't put on the table the need for fiscal union across Europe, the need for jointly issued bonds across Europe and the need for the creditors of the problem economies to be bailed out, largely by the governments of Germany and France and some of the other smaller but stronger European governments.

The alternative would see a Greek Default cost the banks dearly in Germany, which would then have to be bailed out by the German government. The recession that would follow for Europe would hit the German economy particularly hard. So either way, Germany has to pay. It's just a matter of whether they do it willingly and orderly or in a much more disorderly and perhaps more costly way.

Market Wrap #65 - MARTIN LAKOS, MACQUARIE PRIVATE WEALTH

Tue, 11 Oct 2011 03:32:00 GMT

Local investors were still looking very much offshore, with announcement of French bank downgrade. The reality is investors have been captive to headlines for some months now.

The market was up 35 points in morning trade on the slightly steadier performance out of the US and Europe. However when headlines came out that Chinese premier Wen Jiabao had commented at the World Economic Forum in China that the Western economies need to improve the unemployment, cut deficits and not be rely on China to supporting the debt bailout.

The markets got nervous on that news and only got worse with the the announcement in the afternoon that credit ratings agency Moody's downgraded the long-term credit ratings by one notch of both Societe Generale, due to its reliance on wholesale funding and Credit Agricole for its total Greek debt exposure.

Futures on European markets tonight are all down at least one per cent, so it looks like another rocky road.

The consumer confidence numbers out today were surprisingly good, but unfortunately it didn't have the impact on our market that we would have expected. The survey was up 8 per cent, well above expectations. Interestingly, all components of that consumer confidence survey were up. The most interesting, was that in fact the households relating to their current finance position was up 11 per cent. We have seen in the past when households feel that their household finance position is improving and the outlook for the next 12 months was going to continue that way, and then in fact we do see a follow on with consumer spending.

August unemployment rises to a 10 month high.

Tue, 11 Oct 2011 03:50:00 GMT

A warning on the jobs front today with the unemployment rate on the rise. Economists had been expecting the rate to hold steady and warn that there could be tougher times ahead.

The unemployment rate has risen to a 10-month high, unemployment was fairly steady for the first half of the year, but then it began to rise to 5.1 per cent in July and up to 5.3 per cent in August.

Last month, full-time employment was down by 12,500 jobs, but there was a rise in part-time work, so overall employment was down by almost 10,000 jobs with the economy gradually been moving away from full-time jobs, more towards the flexibility of part-time jobs.

In a statement on Tuesday, the Reserve Bank's Glenn Stevens said, "Growth in employment has been moderate this year ..." And he says reports of skills shortages remain confined to the resources and related sectors.

But despite the reported skills shortages, Paul Bloxham from HSBC says the rise in unemployment has been driven by the mining states of WA and Queensland. “We think that that's because firms got ahead of themselves in term of taking on labour last year in preparation for all these big mining projects and they've actually started unwinding a little bit of that, because they potentially got a little bit overzealous”.

In the last few weeks a number of high-profile companies have been shedding jobs, including a thousand jobs each at BlueScope and Qantas, and there could be more to come on the back of a very high Aussie dollar, industry that is exchange rate-sensitive, are finding it very tough so we well may see some sort of high-profile cases of people losing jobs or companies moving offshore.

Some economists say if the weak job numbers continue, the Reserve Bank may drop interest rates.

Market Wrap #87 - MARTIN LAKOS, MACQUARIE PRIVATE WEALTH

Tue, 11 Oct 2011 04:34:00 GMT

First thing this morning after Wall Street closed, the Aussie futures were up 60 points, so certainly indicating a better day ahead and we ended the day closing about 108 points up.

Through our day's trade we saw copper improving, but gold took a big tumble, down $55 at one stage, improving to be down $18.18 an ounce. There was talk on the size of the sell-down; there might have been some switching into the equity markets. We'll have to certainly keep an eye on that.

Also on the back of GDP numbers, the market sort of continued to rally up 70 points at 11.30 and continued that rally. And we also saw the Aussie dollar pick up on the back of those GDP numbers.

Analysts were looking for a GDP of 0.80% with some upgrading to 1.0% so a result of 1.2% was above the markets expectation.

What's still interesting though is the make-up of that component, we did see weak business investment, reasonably strong industry rebuild and probably the positive surprise was household spending was up.

We had a pick-up in transport services of almost 6%, clothing and footwear up about 2.5%, spending at hotels, cafes and restaurants, up nearly 3%. A broad improvement in spending, and what we did see is a commensurate reduction in savings.

We've had savings running at about 11.5%, now down at 10.5% which is still twice the long-term average of the last 10 years, so, Aussies are still putting money away.

The reserve bank governor Glenn Stevens Perth speech was primarily about reinforcing the same rhetoric about Australian being in good shape with our strong trade surplus and secures banking system. However the RBA is clearly more focused on what is happening overseas and its impact on the global outlook. The board is closely monitoring the rate of change in the deterioration of the global outlook and how that might impact domestic activity.

At this stage, there's no sign the Reserve Bank wants to cut rates.

Tomorrow’s unemployment will be the key, if it starts ticking up further from 5.1% to 5.5% in the next couple of months, that might be enough to trigger the Reserve Bank to think about their current settings and they're clearly going to be watching inflation very closely.

In company news CSL shares rose on the back of news that the Swiss national bank decided to cap the Swiss franc against the Euro, and we saw the Swiss franc drop 8%. Now that's positive news for a company like CSL that has a large proportion of its total costs tied up in Switzerland. It does appear in our view that there could be an improvement on their FX exposures by almost $35 million. Good news for CSL and the stock rallied over a dollar today or nearly 4%.

Share market loses 4% in 6 days

Tue, 11 Oct 2011 04:49:00 GMT

The stock market has continued its terrible start to September as increasing fears of a global recession continue to rattle investors.

After another heavy night of selling in the United States and Europe, the Australian market shed another 1.5 per cent today, taking its loss for the first six days of the month to nearly four per cent, or well over $30 billion.

The rollercoaster continues, with the Australian market down another 3.5 per cent in just two days. The spark for the latest round of global jitters was weaker than expected employment figures from the United States, but the real concern is Europe, where the sovereign debt issues are going from bad to worse. Investors are getting very concerned about Government's ability to actually solve this situation.

Europe's three biggest markets, Germany, France and Italy, have lost 25 per cent of their value over the last six weeks. By comparison, Australia is off 10 per cent. At the centre of the turmoil is debt-ridden Greece, and Perpetual's Matthew Sherwood says the failure of the European to deliver on a planned rescue package is of major concern. “They're starting to back away from what they agreed to, and then Finland said, "Well, we would need more gold as collateral to initiate these loans", and now there's concerns Germany's falling into recession. Suddenly what was an easy solution is becoming increasingly complicated”

Germany's worsening economic situation has made the politics of Europe's biggest economy leading a bailout of Greece much harder for Chancellor Angela Merkel. As the red ink continues to flow on the German stock market, big investors are making their feelings known.

Some believe that Greece should be expelled from the euro zone because even Greece acknowledges it can’t meet the debt and deficit targets.

That's not a view shared by the new head of the European Central Bank. Rather than cutting struggling countries adrift, he's calling for even closer economic and political integration focusing on rules for fiscal discipline and economic growth.

And growth is something also lacking in the United States, where unemployment stays doggedly stuck at around 9 per cent. All eyes are now on president Obama as he prepares to make a major speech on job creation on Friday.

Getting the world's biggest economy back to work would go a long way towards stabilising global financial markets, whatever happens in Europe. In the meantime, investors are once again turning their attention to gold, which, at around US $1,900 an ounce, is back around record levels.

The Claytons Rate Hike

Tue, 04 Oct 2011 01:29:00 GMT

The interest rate ‘hold’ decision today marks ten straight months of flat rates; the most stable interest rate environment for five years. Anyone would be forgiven to raise an eyebrow at that; the spectre of an interest rate rise has been lurking since at least March when inflation once again moved above 3%.

Even though the RBA hasn't increased rates since November last year, the minutes the RBA releases following its meetings have mostly pointed to what the RBA has terms "tightening bias" - which means that the Board is mostly considering increasing interest rates.

These minutes allows the RBA to be transparent, but more importantly it allows us to get our financial affairs in the right kind of order for a potential rate rise.

In many ways, speculation about rising interest rates has virtually the same effect as the cash rate actually rising. By telling us that rates might rise they change our behaviour. Consumers remain cautious about taking on higher levels of debt and are less willing to make high commitment purchases such as housing, investment or big ticket retail items, which is exactly what we've done since November.

On average, Australians continue to pay down debt and increase their savings rate - just the sort of behaviour you'd expect if you thought that rates were going to rise

But regardless of that argument, it's a reasonable assumption that the RBA will increase interest rates in the next 12 months, and when they do, the banks will follow. So your first move should be if you've got a variable rate mortgage is to have you loans reviewed and seek out a better cheaper alternative. Banks are strongly competing for new business so now is the best time to switch and save.

Your second move should be to increase your repayments as much as you possibly. Every dollar you pay ahead of time will both reduce the length of your loan, and make you less vulnerable to the next rate rise. In fact, paying down debt (especially non tax-deductible debt) is the best way to get ready for any rate rise.

Bargain Stocks and Cheap Mortgages...... Every Cloud has a Silver Lining

Mon, 10 Oct 2011 05:15:00 GMT

The Dow Jones fell over 600 points, the worst single day fall since December 2008. At the close the index had lost just over 5.5%. The collapse came on the back of Standard & Poor’s downgrade of U.S. debt and government backed mortgage debt.

Investors fled to gold pushing up an ounce of gold to a record $1,720 and oil has fallen to just over $81 an almost 20% fall in a fortnight on fears of a pending U.S. recession.

What's changed for BHP or the banks in the past week? On the surface, nothing. But underneath there's the fear of a second global recession pushed the ASX into free fall shedding more than 200 points a 5.60% fall, however as the fear subsided and the panic stricken investors’ heads cooled on the release of new Chinese data and the market rallied over 250 points to produce a 1% gain for the day.

The banking sector led the way with 2.3% gains followed by energy stocks up 1.6% and our miners up 1%. The market however is still down 19% from its April highs and there are many bargains to be had for the strong willed.

“You make your money during bear markets; you just don’t know it at the time.” – Shelby Davis

3 Year fixed rates have been cut by Westpac, CBA, St George, Citibank, ING and other non bank lenders to 6.69% p.a. - 6.79% p.a. providing a significant savings from current average variable rate mortgages. For the first time since 2008 there is now almost 30 basis point advantage to fix your mortgage and ease some of those budgetary pressures all family are facing.

A Red Day on the Markets......Here We Go Again

Mon, 10 Oct 2011 05:16:00 GMT

It looks like August 2007 all over again as financial markets tumble and panic and fear dominates investors’ decision making. The ASX has fallen 13% over the past fortnight wiping almost 200 billion off the exchange.

There is growing fears of Greece’s ability to repay its debts has spread to the larger economies of Spain and Italy. Italian prime minister Silvio Berlusconi was attempting to call for calm as yields on 10 year bonds surged to record highs over 6% as they too become linked to the so called PIIGS (Portugal, Ireland, Italy, Greece, Spain). Italian debt is now 120% of GDP and on this measure they are now the third biggest debtor in the world.

Across the Atlantic in the U.S. the fear is they are heading into another recession after recording GDP of 0.40% for the first 3 months of the year as Americans still struggle to find work and congress’ protracted debt ceiling negotiations forcing a credit downgrade by the rating agencies.

There's been a big drop in confidence in policymakers' ability to steer these economies (in Europe and the United States) back to growth.

Back at home in its August statement on monetary policy the RBA suggested household’s self imposed austerity measures has seen savings ratio exceed 11.5% of disposable income, the highest in 20 years after more than a decade of very strong growth. Household confidence has fallen and there has been little growth in household net worth over the past year with house prices weakening most notably in Perth & Brisbane. The change in household behaviour is also evident in borrowing decisions, with credit cards being paid off and growth in mortgages the slowest for many years.

Our economy may be riding on the back of the resources sector and strong growth in Asia however here too there is this worry that major western governments will not have the capacity to borrow their way out of trouble this time around. There is genuine concern that if governments cannot borrow then banks or other businesses and quite possibly even some of the PIIGS will become bankrupt.

If the world slumps into recession, the cost of borrowing for our banks will again become tight. If companies shed jobs, then housing values will come into serious question. Asset values of all types will be under severe pressure. This is what happens when the world gets nervous, and has to confront its debt problems.

RBA Leave Rates on Hold.....for Now

Tue, 11 Oct 2011 06:22:00 GMT

The Reserve Bank Board Meeting for August 2011

RBA left the cash rate at 4.75%
The Board is concerned about the pickup in underlying inflation
A Rate rise was considered
The Board is looking for an easing in financial market nerves and improvement in domestic non-mining economic data

What a difference a few weeks make. Views on the direction of interest rates have shifted between rate cuts to rate increases in the end the RBA stood still reluctantly but issued a warning of further increases if inflation can’t be contained in the shorter term.

The June quarter delivered an annualised underlying inflation rate of 3.5%; this in itself would have produced a rate rise. However the difficulty in getting a clear read on the economy has seen the RBA prudently adopt a wait and see approach.

As we indicated last month, the case for further interest rate cuts or increases can be equally supported with the release of new economic data.

Global growth continues but slowed in Q2
Domestically resource related parts of the economy are strong but other areas are suffering from high Aussie dollar and cautious consumer
Underlying inflation is trending up
Productivity growth is weak with inflation is putting pressure on wages growth in a tightening labour market.

It is this conflicting data that provided a reprieve from a further rate rise today; however it clearer now that the only direction the RBA can move in the future is up, the only question is when?

June Quarter CPI: Will inflation cause the RBA to increase rates?

Tue, 11 Oct 2011 06:21:00 GMT

Prices rose more strongly than expected in the June quarter, and more disturbingly, underlying inflation did likewise, leaving the Reserve Bank with an interest rate dilemma: will the RBA's inflation fighters be forced to put up interest rates against a backdrop of global upheaval over debt?

June quarter inflation rose 0.9%, leaving the annual rate at 3.6 per cent. The biggest increases came from fruit, especially bananas, the medical sector, petrol, and clothing and footwear. More importantly these increases can’t be blamed on the devastating Queensland and Victorian floods and cyclone Yasi’s impact on food prices. The Reserve Bank's measure of underlying inflation was also up by a stronger than expected 0.9 per cent, suggesting the price pressures are more broad-based.

This raises serious concerns for the RBA, as they see that inflation is picking up at a faster pace than even the RBA thought at this point of the cycle. Today’s result saw talks of a rate cut subside, but not totally disappear.

With the RBA board meeting on Tuesday we are sure to hear their views which will provide greater clarity on the direction of monetary policy. If the rhetoric in that statement really starts to sort of show increasing concern about the inflation outlook, then I would expect the market will no longer be pricing in some chance of a rate cut before year end.

At the end of the day, if the domestic considerations and higher inflation win out, then they are likely to deliver a hike at the end of the year, as with so much global uncertainty around this should keep the RBA on the sidelines for a bit longer.

The foreign exchange traders weren't waiting around. The prospects of higher interest rates sent the Australian dollar above 110 US cents to a new 29-year high.

Interest Rate Outlook: Is the next move by the RBA a Rate Cut?

Tue, 11 Oct 2011 06:19:00 GMT

Interest Rate Outlook: Is the next move by the RBA a Rate Cut?

The RBA have released the minutes of their July meeting and the omission of the explicit sentence that “further tightening in monetary policy would be necessary at some point” (this sentence has been part of the RBA’s language for some time now) is a clear indication that the RBA has shifted from a contractionary stance (increase in rates) to a neutral stance (rates on hold).

The RBA’s change in stance is mainly driven by the slower pace of global growth and greater downside risks to the economic outlook, mainly stemming from the global economy. Concerns over the European sovereign debt issues and US economic recovery have cast a cloud over the global growth outlook.

Furthermore, the RBA admits that how long the slower global growth will persist is “unknown”. This unknown means that forecasting the outlook for rates is subject to greater variability than normal.

The Case for a Rate Rise

Chinese economy is continuing to expand at a solid pace with growth in investments and exports remaining strong and driving demand for Australian resources.

The RBA is still petrified about inflation and that’s the big watch for the RBA Board members. The light on the next inflation report – due on July 27 – will shine bright. The RBA has stressed that the outcome for CPI will be “important in helping to shape views about inflation, and therefore the future path of interest rates”.

The Case for a Rate Cut

The RBA and its board are a bit surprised about the softness of the economy. The triple whammy of the floods, the rate rises and the high dollar have cut into the momentum of many businesses.

The recent Sensis Business Index, which is a good SME health barometer, recorded one of the largest quarterly falls in business confidence we have seen in the 18-year history of the report. Throw in recent weak car sales, the 0.6 per cent fall in retail spending in May, the fall in the inflation forecast to 2.5%, the 2.7% drop in house prices this year nationally and the fact that loans for housing are at the weakest level in 34 years.

What the Economist Say

These strong competing forces are shaping an uncertain outlook which is best reflected in the wide divergence of views on where the cash rate will be in twelve months’ time The results of a poll taken on Friday 15 July reveal the range of forecasts among the economist fraternity as 4.00% (representing rate cut of 0.75%) to 5.75% (representing a 1.00% rate rise).

The case for a further rate rise may be harder to make but the jury is still out on any potential case for a rate cut.