Market Braces For More Pain

The Age

Monday June 30, 2008

Scott Murdoch

THE Australian financial market will round out its worst performance in nearly 30 years today as global equities markets become mired in bear market territory.

The major Australian indices should open in the red today, as oil, Eurozone growth concerns and inflationary fears pegged back Wall Street on Friday night.

The Dow Jones in New York was sold down by a further 106points, to take the industrial averages index to border on a bear market.

At one stage during Friday night's trading, the index did fall to as low as 11,298.15 which marked a 20% reduction since the all-time high of 14,164.53 which it hit in October last year. The Dow is now off 19.8%.

Financial stability is now emerging as a risk to the market's condition at the moment, particularly after the IMF revealed it would carry out one of the most extensive reviews ever of the US banking and financial systems. A number of commentators have interpreted this as a monumental slap in the face for Ben Bernanke.

Oil is still dominant on the list of risks for investors too. On the international sessions over the weekend, crude contracts broke through the $US140-a-barrel mark and touched $US142, leaving the question confronting analysts now of just where the price will end up.

Goldman Sachs was criticised earlier this year for its prediction that $US200 a barrel was not out of the realm of reason, however, at the other end of the scale the Royal Bank of Scotland has maintained its call that oil will retreat to $US86 a barrel.

The futures market has pointed towards a mildly negative open for the ASX200, but the index should come under sustained selling pressure as hedge funds and the institutional investors clear the books for the start of the new fiscal year. In Australia, nearly $400 billion has been wiped from the value of shares this year alone.

Markets around the world have endured the technical correction of a 10% fall, and most are now approaching bear market territory.

Since the peak of equities late last year, it has been a wild ride for markets in a race to the bottom.

The Australian market, come the settlement of trading today, will be down in the order of 16-17%. The peak was reached in November as the benchmark index, the S&P/ASX200, flirted with the 6600 barrier.

There has only been downside since then, and most in the market believe the rout is not yet over. The negative return will be the worst since the early 1980s and in a big concern for investors, some superannuation funds are reporting losses of up to 25%.

Investors who had become almost accustomed to the double-digit returns of the powerful bull markets in Australia over the past six years have been burnt.

And there is little on the horizon in Australia, and around the rest of the world for that matter, which could spark a rebound in sentiment.

Put simply, at the moment there is no incentive to be in equities. A look at the fundamentals of the market and the broader Australian economy explains why. Economic activity is on the way down, inflation is painfully high and sentiment is woeful.

There is one factor that could spark a slight rebound in confidence and that is the tax cuts which will be delivered to workers this week.

From tomorrow, the pay packets of the average worker earning $50,000 a year will be up $20 a week.

The tax cuts will not have as much of a stimulatory effect as initially thought when Labor duplicated the Coalition's plan during the election with its $31billion package.

The first round is worth about $7 billion and Treasurer Wayne Swan revealed yesterday that the Government faced intense pressure earlier this year to scrap the tax cuts, on experts' fears the tax cuts could add to domestic demand. Now that the economy is slowing and there's a risk the slow-down could in fact become too sharp, the tax cuts could prove particularly valuable.

They will also move more workers back in to the labour force. The unemployment rate has edged up over the past few years, and the best way to weather an uncertain economic climate is to have people in jobs.

The Treasury modelling that Labor has relied upon has shown that up to 35,000 extra workers could move back into the workforce, with most of them being women.

The tax cuts come at a time when petrol is sky high and mortgage rates have moved sharply up so a bolstered pay-packet should do more good than harm. It those factors that should have the Reserve Bank leaving rates not only on hold at tomorrow's meeting for July, but indeed for the rest of the year.

But in terms of the broader financial markets, a rebound is going to be more dependent on a major fundamental turnaround in global conditions for equities.

And at the moment there does not seem anything on the short-term horizon that is going to bring the markets out of the territory usually reserved for bears.

smurdoch@fairfax.com.au

© 2008 The Age

Back to News Index | Back to Home