In that context we were discussing the misfortunes of the Australian dollar during the last two months. But the same can be said for the stock market as well. During the current earnings season there has been a bit of a mixed bag with some showing excellent revenue and profits (BHP and Rio) while others have been woeful (Babcock & Brown).

At the moment, the outlook for a broad rise in the stockmarket doesn’t look good. Ever since the market topped out last October the S&P/ASX200 has continued to drift downwards, punctuated by false rallies on the back of over optimism.

But there is light at the end of the tunnel. The problem is that we can’t quite work out how long the tunnel is. There are positives that should ensure that Australia emerges from any economic downturn without too much agony.

As a resources led economy there is often talk that any downturn in the US economy will reduce demand for goods there, which will reduce demand for imports to the US from China which will reduce demand from China for Australia’s resources. Of course, this will have an impact but probably not to the degree that is feared.

Thanks to the massive demand for raw materials companies such as BHP Billiton, Rio Tinto and Fortescue Metals have been able to charge big premiums for their commodities. Any downturn in the US and Europe is bound to have some impact, however there is still ample room for Asian economies to grow without the need to rely on the US and Europe. Demand for Asian domestic consumption will be the next growth area as incomes rise and the standard of living rises with it.

Another insulator for Australia is the concentration of business in a small number of large companies. Many Australian sectors are in effect presided over by duopolies where the lack of major competition has allowed them to maintain healthy profit margins. The relevant smallness of the Australian economy makes it that much harder for new entrants on a large scale.

This allows them to maintain some of their margins without the fear of being undercut by competitors. And when competitors do come into the market they have to work fast in order to build up market share. A tough ask when consumers are comfortable the same brand they have used for years.

So what does that mean as investors? It really means that with the market having fallen so far since last year, the opportunities for value in this market are starting to present themselves so now is the time that investors should be starting to get back into the markets. Unfortunately, history tells us that for most retail investors they tend to exit the market just at the time when they should be getting back in.

Aussie Dollar Slips Under US89c

Whoa. While we slept off our stupid allergy over the weekend, the Aussie dollar went into free-fall. No-one wants to buy a currency at the top of its interest rate cycle. It’s trading below US89 cents this morning.

If you find yourself standing around a water-cooler this week with financial buffs, make sure you have something to say about interest rates. Otherwise there might be an awkward silence or two. This is what’s driving the currency markets at the moment. Rate speculation.

Banks Climb as Market Prices in Interest Rate Cut

For a start, everyone loves an interest rate cut. We don’t have one yet, but that doesn’t deter a horde of rampaging investors with a little bit of knowledge. So financials and retail stocks caught the buying bug.

The whole financial sector soard 5% in fact. Even the money markets are beginning to act as though the cash rate is 25-50 points lower. You’ll note the Bank Pain Index to your right has eased considerably this week. You can pretty much put that all down to traders’ expectations. They think a cut’s coming. They’ve moved early, pushing down short-term market interest rates.

What we want to know is whether markets rates will keep dropping.

If so, banks earnings will benefit. If not, they’ll continue sliding. We’re going for option B. And if their costs stay high, there’s every chance the Big Four will keep their rates up if the RBA cuts. But that isn’t a good thing. It means they’re running faster to stay in the same place. They’d be keeping prices high to maintain earnings, not grow them.

For Australia’s central bank meanwhile, things are way off the charts. It used to have a nice, easy formula of raising or lowering rates in response to consumer inflation. That plan’s holding up like a pavlova under an elephant. If it cuts rates this year, it’s basically admitting that.

We see the big drivers of inflation coming from gaps in supply (think oil) in the near future. That makes the RBA’s economic policy far less relevant than it used to be. Petrol prices are the new Reserve Bank of Australia.

Aussie Dollar Pushes Up Two Sectors

One of the victims of interest rate speculation has been the Aussie dollar.

Our falling currency might’ve helped push the miners up yesterday. Some of them (notably Rio and BHP) report their earnings in US dollars. Most commodities are traded in greenbacks. It makes sense. But this means that a rising Aussie D reduces earnings from the Australian shareholder’s perspective.

Manufacturers too. Our blazing currency hasn’t helped them sell anything overseas.

But while our dollar takes a rest, both of these types of companies could turn out to be short term trades.

Three Surprisingly Good Bottom Lines

As for Earnings results…the market got a bunch of good ones yesterday. But it was the most surprising, wacky collection of winners you’ve ever seen. Imagine Willy Wonka and a handful of Oompa-Loompa’s taking out the men’s 4×400m relay gold medal. Now you’re getting close.

The oddities began with this: online ticket portal Webjet (ASX:WEB) increased its profits by 134% last year. Airline prices are soaring. Yet this company managed to profit from that somehow. Its share price added 11%.

The only thing more Australian than a backyard clothesline is a football player being remanded in police custody. Hills Industries (ASX:HIL), the firm responsible for the Hills Hoist clothesline, somehow pulled off a 16th straight profit record.

That’s not bad. Especially when you consider how it must be hurting from steel prices.

And sleep specialist Resmed (ASX:RMD) added 66% to its net profit. Actually, that’s not surprising at all. This market’s enough to give anyone insomnia.

And as for the latest on Energy.

The market is up 132. Financials rocketing – up 4.2% after the strong lead from the US. The main theme has changed in the last 24 hours from inflation fears and pressure on interest rates to lower inflation and interest rate cuts. It is a very important change in market thinking and at the risk of crying “Wolf” is a significant foundation for a market rally from here….whereas other rallies have been little more than a thrashing herd changing direction. 

RBA set to cut rates in September with a 68% chance of a 50bp point cut factored into Futures markets. Property flying – up 3.8%. Building stocks strong.  SFE Futures were up 88 this morning. Resources also up 2.0% but getting left behind.

Dow up 331. Up 332 at best. Gradually rose all session and closed on high. Dow up the most in four months. All 10 sectors up. 7 sectors up more than 2%. 91% of S&P500 components up. FOMC leave the Fed funds rate unchanged at 2.00%.Key point: Oil fell to a 3-month low and resources fell - the talk on CNBC this morning is that the Fed expect commodity prices to fall allowing them to ease up on the prospect of interest rate rises. Some signs of growth - July’s ISM non-manufacturing index up more than expected. Crude down another 2.4%helped oil-sensitive stocks. Consumer discretionary sector up 4.4% (steepest advance in 5-years), Retailers up 5.3%, Airlines up 9.4% and Transportation up 4.9%. Commodities CRB Index lost 10% in July – steepest decline in 29-years as oil, copper and wheat prices plummeted. Energy underperformed on falling oil prices – only up 1.1%. Financials up a whopping 5.1% - helped by a rise in European banks after Paris’s Societe Generale posted better-than-expected earnings. AIG led the jump – up 12% on an upgrade to BUY at UBS. Mortgage related stocks jumped – MBIA up 8.79%, AMBAC 12.89%, the 2F’s (Fannie and Freddie) up 14.96% and 6.91%.

• Both BHP and RIO down in ADR form overnight, 2.09% and 2.42% respectively. BHP up 93c to 3675c. RIO up 311c to 11390c.
• Metals mixed overnight – Copper up 0.44% and Aluminium up 0.64%. Zinc down 1.31% and Nickel down 2.31%. Oz Minerals up 6.1% or 10c to 173c.
• Oil price down $2.74 to $118.71 on belief that a slower US economy will reduce demand. WPL up 69c to 5189c.
• Gold down $21.70 to $881.80. NCM down 71c to 2560c.
• Bonds down with the 10 year yield up to 4.02% from 3.97%.

Gold stocks getting belted again today - as a hedge against inflation Gold will struggle with the lower inflation theme.

Stocks that struggle with a higher A$ doing well today on hopes that interest rates and the A%$ have peaked. Talk of the A$ going under 90c.
 

Australian Housing Finance slumps 3.7% in June- more than the 2.0% expected – investor housing finance also down 0.3%. Weak numbers will support the RBA’s bias towards cutting rates.

Most Oil stocks up despite an overnight fall in the oil price.

Asciano (AIO) up 6c to 501c on results and comments that they have had approaches for their assets. The company rejected a private equity bid on Monday at 440c.

News Corp’s (NWS) up 4Q results see a 27% jump in net income. Said their pace of growth will ease and that more challenging economic conditions are ahead. Well received in the Us and here and benefiting from the fall in the A$. NWS up 3.84% or 62c to 1672c.

Corporate Express (CXP) half year results not flash and contains net profit guidance of $61.7m-$66.1m. CXP negotiating with possible acquisition targets. Weres think result disappointing and they are reviewing forecasts. CXP flat at 560c.

ResMed (RMD) announced 4Q net profit grew by 7% and FY08 earnings up 66%. CEO says well positioned to deliver strong growth in FY09. RMD up 13.65% or 55c to 458.

NAB announced the first phase of its Next Generation Platform initiative to replace core banking systems over the next 5-years. Up 90c to 2565c.

Beach Petroleum (BPT) announced substantial coal seam gas reserves upgrade – 282% jump in probable reserves at Surat Basin. BPT up 4c or 3.85% to 108c.

Newcrest Mining (NCM) says partial gas from Varanus island now flowing to Telfer mine – 50% of gas to Telfer under contract with Apache will now be possible. NCM down 2.7% or 71c to 2560c.

Tower Australia (TWR) said St George Bank’s switch to AIG Life as favoured new life insurance partner will impact around $60m on TWR’s $700m in-force book. No impact on FY08 with slight profit impact in FY09. TWR up 4.62% or 7.5c to 170c.

Tabcorp (TAH) tipped by Weres to spend $400m in capex for its Star City casino. TAH expected to write down the value of its Victorian gambling license in FY results tomorrow. Analysts consensus for net profit before one-offs is $515m, up 14% on last year. TAH up 21c to 877c.

PanAust (PNA) confirms high-grade Copper-Gold at Puthep, Thailand – project study at feasibility stage and to be completed 1H09. PNA up 1.5c to 70.5c.

Seven’s (SEV) FY year results yesterday sees brokers holding or cutting target prices this morning – acquisitions seen as the key to unlocking value - buyback to support share price. SEV up 11c to 850c.

PaperlinX (PPX) being tipped by JP Morgan to report FY08 net profit of $50m, 32% down on FY07 on August 21^st. PPX up 12.44% or 25c to 226c.

WA News (WAN) tipped by JP Morgan to post FY profit of $126m later today. WAN up 2.57% or 23c to 919c.

The loss on the Australian dollar extended on Friday night as it tumbled below 93 US cents in offshore trading after the market concluded that interest rates here will fall in coming months. The gloomy news on the economy has all but guaranteed that the next move in rates will be down: not at tomorrow’s Reserve Bank board meeting (although there is a slight chance of that happening) but at RBA board meetings next month or in October. The Aussie dollar fell from 95.84 in Sydney last Friday week to 92.92 in New York early Saturday. That’s a fall of around 3% on the week, which is a substantial move, given the tight range it has traded in over the past couple of months. The close is the lowest in more than two months and means the currency has fallen by more than 5% in just over a fortnight after peaking at over 98 US cents. The prospect of lower interest rates drags down the yield for investors, an attraction of the currency and Australian stock, property and other assets, especially since the RBA started boosting rates last August in the final round of rate increases. Helping to send the dollar lower has been the fall in commodities, which dropped 28% last month according to most indexes. Oil is down 18% in the last three weeks, but perked up on Friday on signs of renewed tensions between Iran and the rest of the world over its nuclear program. Iran said on Saturday it would not back down in its nuclear row with major western countries powers, voicing defiance on the day of an informal deadline set by the West over Tehran’s disputed atomic ambitions. Western officials gave Tehran two weeks from July 19 to respond to their offer to hold off from imposing more UN sanctions on Iran if it froze any expansion of its nuclear work. That would suggest a deadline of Saturday but Iran dismissed the idea of having two weeks to reply. The result will be a more volatile oil price this week, which could retrace much of the ground lost in the past three weeks. Perhaps Iran has a major oil sale to conclude and wants a higher price. Oil prices jumped higher Friday after the Bush Administration set the weekend as a deadline for Iran, a major oil producer, to reply to an international offer of incentives for a freeze in its nuclear drive. In reaction, New York crude for September delivery, rose as high as $US128.60 a barrel, before retreating to close at $US125.10, a gain of $US1.02 from Thursday’s finish. In London, Brent North Sea crude for September delivery went as high as $US127.94 on Friday. It subsequently settled up 20 cents at $US124.18. The AMP’s Dr Shane Oliver says the rapid downturn in the Australian economy is making it harder to see parity for the Australian dollar with the US currency, being reached in the short term. “In fact with the market now pricing in rate cuts the ride for the $A could be pretty rough over the next six months with a fall back to around $US0.85 a distinct possibility. “The long term trend in the $A is likely to remain up though in response to the long term rising trend in commodity prices but for now it is starting to look like parity has been postponed.” But any rise in tension in the middle east could see investors flock back to oil and other commodities, sending the Aussie dollar higher. The AMP’s Dr Shane Oliver says the next few months are likely to remain rough for shares. Shares have the potential to rally further in the short term as extremely negative investor sentiment is unwound. “However, it is too early to say that the bottom in shares has been seen. The still high oil price, slowing growth virtually everywhere, profit downgrades, inflation worries and the continuing credit crunch are all big short-term headwinds for shares and are likely to ensure a rough ride with possible further falls out to the normally weak September/October period. “Notwithstanding all the short term uncertainties, we still see shares rallying sharply later this year as the oil price falls further, more central banks including the RBA start moving to cut interest rates helping to improve confidence regarding the economic outlook and as investors start to take advantage of attractive share valuations.  For those prepared to take a long term view current share market levels offer great long term opportunities, but of course there could be further weakness in the short term. “Key signposts to look for to confirm that shares are on track for a sustainable rally are: a sharp and sustained fall in the oil price, reduced inflation worries, lower bond yields, more relaxed central banks, slowing US house price falls and a sustained improvement in credit markets.  Of these the oil price has started to move in the right direction, but needs to fall further, and the other signposts are yet to fall into place.

 

US shares slipped Friday, completing a volatile week, as investors chewed over a seventh straight month of job losses, a huge $US15 billion -plus loss General Motors and slumping the worst monthly sales figures for US cars for 16 years.

The three major indexes fell on Friday on Wall Street and ended the week with losses.

The Dow Jones industrial average was down by almost 0.5%, the Standard & Poor’s 500 Index was down 0.6% and Nasdaq composite index slid 0.6%.

For all of the market gyrations last week, all three indexes finished the week almost exactly where they started the week. 

The Dow lost 0.4%, the S&P 500 finished 0.2% higher, and Nasdaq ended less than a point higher from where it started the week.

 

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The Australian stock market is expected to open lower on Monday after a fall on Wall Street, but some companies will receive a boost from speculation of a rate cut by the Reserve Bank of Australia (RBA). 

The futures market was forecasting a 38 point fall for the ASX 200 after trading finished overnight Friday.

The market fell Friday around 1.5%, thanks to worries about financial shares after the Suncorp Metway earnings downgrade and further concerns about the economy.

The ASX200 fell 73.4 points, or 1.47% to 4904, while the All Ordinaries shed 74.6 points, or 1.48% to 4978.

And Premier Investments is within sight (so it says) of snatching control of Just Group, the clothing retailer. Premier says its $780 million is now backed by 46.3% of Just shareholders through arrangements or the share acceptance facility..

The offer of 0.25 Premier shares and $2.095 cash values Just at $3.88 a share, based on Friday’s closing prices. 

The extra cash and dividend promised by Premier would increase the price to $4.06. Just shares fell 7 cents on Friday to $3.25, Premier shares rose 8 cents to $7.14.

Premier last week said it may raise the cash part of its offer by 15 cents to $2.245 a share if it receives acceptances for 90% by Wednesday, August 6. Shareholders may also get a dividend worth 4.5 cents for each Just share.

Mirvac and AMP Capital, Australian-based asset managers, have stopped redemptions from some of their property funds as investors dump property assets amid the global credit crisis.

Mrivac froze three mortgage funds holding more than $243 million, according to a statement from the joint venture Mirvac AQUA’s. AMP Capital, the investment management arm of Australia’s biggest life insurer, halted withdrawals from $NZ420 million in a New Zealand property fund, two days after Suncorp-Metway Ltd. suspended a $NZ249 million fund.

And in good news, Apache Corp, the US energy group, says it now expects gas from its Varanus Island (off the WA northwestern coast) plant to be available this week in limited quantities. The plant was shut after an explosion on June 3.

The company says partial sales will begin in the “next few days” with initial production expected to be 110 million cubic feet of gas a day. That should double later in August, with full output of 330 million cubic feet by year-end.

The June 3 blast damaged pipelines at the plant and cut 30% of Western Australia’s gas supplies. The disruption left mining companies and small businesses scrambling to secure fuel in the state. 

The state’s Chamber of Commerce and Industry claimed the accident could cost the economy $6.7 billion. The news will be welcomed by Santos which has a joint venture with Apache in one of the producing fields serviced by the facility.

 

 

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And, amid weak markets in Europe, Asia and the America’s on Friday, none were as damaged as Ireland’s market where the main index, the ISEQ Index dropped the most in over 10 years after a leading drug company’s shares plunged 46% on news of problems with a new drug.

Elan Corp, Ireland’s biggest drugmaker, confirmed of two new cases of a deadly brain infection in patients taking its Tysabri drug for multiple sclerosis.

The Index plunged 6.5%, or 281.92 points, to 4,089.7, on the news, the biggest drop since October 1997.

The index had earlier fallen as much as 9.5%, under the 4,000 mark for the first time in five years, on the news.

Bloomberg reckons the ISEQ, is the third worst performing index in Europe after Ukraine and Bulgaria.

That’s a bit of a joke: they are highly speculative emerging markets. Ireland is a much more developed economy and the loss is terrible for a market heading for its second loss in a row.

That’s after a decade or more of boom-like conditions that caused the country to be called The Celtic Tiger. Now it’s more like The Celtic basket case.

Ireland’s economy is facing recession and the weakest performance in almost a quarter century.

Elan accounts for around 7% of the Index’s weighting, so the loss on Friday was terrible.

The two cases, from the European Union, were the first since the drug was reintroduced in the US in 2006.

Bloomberg said on Friday that the cases of the disease, progressive multifocal leukoencephalopathy, were confirmed this week, Elan’s partner Biogen Idec Inc. said.

Earlier last week Elan shares slumped after its experimental treatment for Alzheimer’s disease, bapineuzumab, was linked in a study to a brain-swelling side effect. The stock collapsed last week, losing 65% overall.

 

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And the latest commodity price index from the Reserve Bank shows that in July the Index rose by 3.0% (on a monthly average basis) in SDR terms, following an increase of 3.1% per cent (revised) in June.

The RBA said the largest contributors to the rise in July were increases in the prices of coking coal, thermal coal, gold and beef.

The prices of wheat and nickel fell.

In Australian dollar terms, the Index rose by 2.8% last month, following an increase of 2.4% (revised) in June. (And if the 5% fall in the value of the Aussie dollar is maintained for August, there will be another nice rise this month for the index.)

The RBA said that inclusion of ABS export price estimates in the Index for coking coal, thermal coal and iron ore has resulted in an upward revision to the level of the Index in April and May, and a downward revision to June.

Preliminary estimates for these commodities have been incorporated into the Index for July.

While the increase in iron ore contract prices is now incorporated in the Index, contract price increases for coking coal and thermal coal are still flowing through to export prices.

So there will be more revisions and rises this month, and a bit more if the Aussie dollar remains around 92-93 US cents.

 

 

Attention for investors here will be on the market financials like the banks, June 30 companies reporting and the Reserve Bank board meeting tomorrow, but we should also not take our eye off the US Federal Reserve’s interest rate decision early Wednesday morning, our time. There are also corporate reports in the US, Europe and Britain that could influence markets, while some important statistics will also be released and could influence markets, especially our jobs numbers for July on Thursday. All in all it will be another week of volatility for investors to contend with.It was a year ago this Tuesday that the RBA lifted interest rates to 6.50%; that was the start of four increases that the credit crunch later turned into at least six, or 1.50% or more on mortgage and other rates. Here we have the Reserve Bank board meeting tomorrow: no change is expected. The Fed tomorrow night, our time and the Bank of England and the European Central Bank on Thursday night, our time. After the flood of poor economic news in Australia last week, there’s a small chance of a cut here, but not much. What will be interesting is whether there’s a change in its post meeting statement to signal that an easing is in the offing. The money market has already priced in a 20% chance of an RBA cash rate cut on Tuesday and a 90% probability of a move by October, with two cuts by next February. Australian statistics due for release include the June quarter and 2007-08 financial year house price index, and job ads today, housing finance and employment and unemployment figures for July on Thursday. Unemployment could show a small rise to partly reverse the surprise jump in the number of new jobs in June. The June full year and half year profit reporting season will also start to kick off with stocks such as AXA, Seven network, News Corp and West Australian News due to report. The AMP’s Dr Shane Oliver says his group expects overall profit growth for 2007-08 to come in pretty weak at around +3%, down from +15% in the previous financial year. “The economic back drop to this reporting season is the toughest since 2000-01 as growth has slowed sharply and costs have picked up. All sectors, including resources which have been hit by rising costs, are likely to report soft results for 2007-08. “However, while the results are unlikely to be the disaster the market is currently priced for after its 30% slump from last year’s high, the focus over the next few weeks of the reporting season is likely to be on the outlook statements released by companies and these are likely to be disappointing. “While market expectations for 60% growth from resources in 2008-09 are reasonable given the latest surge in coal and iron ore prices, consensus expectations for 5 to 10% growth in the rest of the market are likely way too strong and will be revised down.” he wrote. After Friday’s shock earnings downgrade from insurer and bank, Suncorp Metway, anything is possible. Important results this week will include transport and infrastructure operator, Asciano. It’s been a constant mention as a possible victim of the credit crunch and had to abandon a stalking takeover attempt of Brambles at a big loss. Its shares have risen recently, so perhaps the company might be out of trouble. Its price has bounced from less than $3 a share to $4.15 close on Friday. The shares rose 71 cents alone last week! Media groups, News Corp, Seven Network and West Australian Newspapers all release final profit this week. Seven is stalking WAN and recently lifted its stake to over 22% in a major creep up the register. News Corp’s newspaper operations in the US and Britain will take a hit and some analysts believe its US Pay TV, film and TV business may also be hurt by indifferent performance and falling consumer spending in the recessed US economy. Tabcorp is another group of interest to report since the Victorian Government snatched its gaming licence post 2012 away from it. The company’s shares have been weak ever since and there has been talk of some corporate activity. In the US the focus will be on the Federal Reserve which is expected to leave interest rates on hold and highlight the offsetting upside risks to inflation and downside risks to growth.

 

The Fed last week added extra liquidity moves to help a still “fragile” financial system which will push its help out into January 2009.

Friday saw the 8th US bank to be seized and closed by regulators this year: it was only a tiddler with just over $US250 million in assets and based in Florida. 

But the news of the failure, coming on a Friday after trading ended, will worry investors again: it’s the third Friday in a row that a bank failure has been announced.

The key US regulator, the FDIC, warned four other small US banks Friday to either get new capital, stop lending in some areas, or to stop issuing credit cards. This can be a precursor to later problems as managements struggle to find new capital or income streams.

We will also get US data for pending home sales, personal spending and the Fed’s preferred measure of core inflation will also be released, while in London The Bank of England also meets to consider interest rates, as will the ECB.

Both central banks will most probably leave rates steady, although the Bank of England is under enormous pressure to ‘do something” to ease the economic pain and the slide towards recession.

Like here, the US and other major economies, rising inflation seems to be the least concern in Britain for most people these days, even with high petrol prices still cutting demand at retailers.

US corporates reporting this week and likely to influence the market are tech bellwether Cisco Systems, consumer products giant, Procter & Gamble and troubled insurer American International Group. All are due to report on Tuesday, US time.

US analysts say that even if the earnings reports are solid and bring some relief, US investors will be on edge as concerns about the impact of the credit crisis on the economy persist. 

That’s especially so after Friday’s report on Friday showed US unemployment rose to 5.7% in July, its highest rate in four years, as employers cut 51,000 non-farm payroll jobs.

That’s why the spotlight will fall on the Fed’s statement that will accompany its rate decision on interest rates early Wednesday morning, our time.

The poor jobs report, along with lower-than-expected second-quarter US economic growth figures, have helped cement views that the Fed will keep benchmark lending rates steady at 2% for several months.