Recently so much talk has been made about whether the global economy is coupled, decoupled…re-coupling, decoupling, or who knows what. Do individual countries economies move alone or are they all intertwined in one big global economic cesspool?

For example, if I showed you a chart of two indexes, but didn’t tell you what they were… you could tell me if they track each other just by looking at them.

Here we’ve got two indexes that over the last year seem to be following the same pattern. While they’re not exact… they track each other pretty well. The two lines on the chart represent the S&P 500 index and the iShares MSCI EAFE index (a broad measure of 21 individual country indexes).

Are these coupled, do they move together? Well in simple investing terms, the answer is yes. The S&P 500 index over the last year is down 22% and the MSCI EAFE index is down about 26%. So are global markets coupled?

Well the answer isn’t always as clear as the example seems…some are and some aren’t.

Just because the broad U.S. markets have been heading south all year and the larger more familiar international countries’ markets have also been on a year-long losing streak…don’t think that every market is following lock-step.
There are opportunities out there in the global markets. Not everyone is facing the same crises as the United States. Some South American countries, the Middle East, parts of Africa and others offer intriguing opportunities.

The markets were fairly stagnant all week - everyone was waiting to see if Congress was really going to eat up Paulson’s proposed US$700 billion bailout scheme.

By the way, as Bob pointed out on Wednesday, that figure doesn’t even begin to cover the normal debt that’s already hanging over our heads. The existing public debt alone figures out to be US$31,600 for every man, women and child in America, and this new demand will add another estimated US$2,300 for every American.

In theory, this new US$700 billion (which is a dreamed up number by the way - not the real figure) will supposedly buy up all the toxic debt off everyone’s books. As usual, it’s coming out of the taxpayer’s wallets.

And as the market leaders held their breath this week, waiting to hear if we’ll all be billed for Wall Street’s questionable dealings, President Bush stepped up to the podium to throw his support behind the bill.

In fact, G.W. Bush was the most vocal he’s been about this financial crisis to date in explaining why we need this bailout. He addressed the nation using words like “long and painful recession,” “crisis” and “edge of collapse.” Basically, he was pulling out the scare tactics so everyone jumps behind this bill.

It may have the President’s support, but is it worth it - considering US$700 billion barely scratches the surface of what is estimated to be over US$3 Trillion?

So now we have the mega US government fund that will save the markets from imploding. It has stopped the rot in sharemarkets, but credit markets remain wary and uncertain. But for the time being, we have to assume that the bailout is going to work even if it could allow some of the folk who caused the current crisis to keep ducking reality and avoid taking their lumps. So it’s no wonder there are mutterings about the fates of Lehman Bros, Merrill Lynch and AIG: the usual collection of opportunists and lurk merchants want to know why the bailout came Friday and not last Sunday when Lehman failed, and then AIG was taken over and Merrill Lynch sent hurrying into the embrace of Bank of America. Lawyers are being assembled and loopholes looked for. So the cynics and smarter investors are asking who gets to bear the cost in the long run. The answer is the American taxpayer is the only one who will pay. So the poor American taxpayer who have already lost their homes in three million cases; faces that prospect in millions more; are losing their jobs (an extra 610,000 so far this year), will now having to support stumping up $US700 billion, and well over a $US1trillion if the costs of early support moves are added in. What about shareholders and managements of the institutions being supported by the Treasury plan? The plan will be rightfully extended to foreign institutions which hold these dodgy securities (That includes the likes of Barclays in London and Deutsche Bank in Germany), so what also about their management and boards? On all the evidence so far, it will do nothing to help end the root cause of the problem, the continuing decline in US home sales, new home starts and house prices. Until that happens, the cost to the US Treasury and to US and other financial groups will continue to escalate. It’s going to do nothing to stop that, or change the direction of the US economy which is sliding towards an increasingly nasty looking recession. An announcement is due from the US government shortly, led by Treasury Secretary Hank Paulson, Federal Reserve chairman Ben Bernanke and US Congressional leaders, detailing the final agreement and the scope of the legislation for the fund. The fund will be around $US700 billion, but that considerably underplays the true cost of the debacle so far. Since March Mr Paulson and Mr Bernanke have spent $US29 billion guaranteeing the bailout of Bear Stearns, $200 billion at least on the bailout of Fannie Mae and Freddie Mac, $85 billion on the bailout of AIG (the big insurer which wrote credit default swaps on a range of debt that it had no idea about) and at least $US50 billion guaranteeing money market funds. That’s $US364 billion. Seeing financial institutions around the world have already written down or lost over $US500 billion (and have raised around $US360 billion in new capital), the cost so far of the debacle that started with dodgy subprime mortgages and associated credit derivatives is well over $US800 billion (including Fannie, Freddie IAG etc). If the $US700 billion is for new purchases of bad securities (and it could be extended to non-US groups at the decision of the Treasury secretary), the cost will balloon.  That will allow the likes of Deutsche Bank, UBS, Credit Swiss and French and UK banks to unload their dodgy securities in certain cases. Assuming that the $700 billion is spent on new securities, the cost could be well over $US1.1 trillion, excluding already announced losses (and over $US1.6 trillion if they are included). Remember that a lot of analysts and commentators, plus bankers and their mates laughed at the International Monetary Fund when it said earlier in the year that the losses could be $US1 trillion. It was obviously very conservative. We are yet to see whether the debt to be bought will include non-mortgage related debt, say CDSs (Credit Default Swaps) and other dodgy credit derivatives issued over the debt of groups like General Motors or healthy US or foreign corporations’ debt. Will it include leverage buyout debt for the likes of private equity groups like Blackstone, KKR, CVC and the like? And on top of all the spending so far on the likes of Bear Stearns and AIG, there’s the $US500 billion spent or being spent a day by the Fed funding the markets in the US, Europe, Japan, Canada, Switzerland and other areas. There’s the $US180 billion swapped last week, there’s the monthly $US200 billion being lent to banks and other groups in the US each 28 days and there’s the daily $US33 billion being injected into US commercial banks each day and the $59 billion primary dealers last week (investment banks).

Even in a US economy that produces $US14.4 trillion worth of goods and services a year, that’s a lot of loot.

In fact a working paper from two IMF economists estimated that banking crises chew up an average of 16% of the GDP of an economy. That’s based on looking at 42 major banking crises around the world from 1970 to 2007 (and not including the current problem).

Spending all that money will intensify long-standing questions about America’s fiscal health, possibly at the expense of another drop in the value of the dollar.

No wonder the US dollar blew out on Friday, sliding to over $US1.44 on the euro (the Australian dollar rose by more than 1.5c in offshore trading on Friday night).

To mitigate the cost and make for a more brutal (to the selling groups) and equitable arrangement for US taxpayers, the purchases could be made by the US Treasury through a bidding process.

Companies that want to offload their dodgy assets would bid to sell to the government at a huge discount. The company willing to sell at the lowest price wins. That’s a reverse auction.

The government would then be able to sell the assets back into the market when it wanted: the government could give the banks a share of the upside if there are any profits.

The Fed lent that $US85 billion to AIG at a margin of 8.5% over the rate banks lend to each other internationally (so-called 3 month LIBOR). That’s around 11% or a bit more in normal times outside of last week.

Using that as a yardstick, the pricing by the Fed could be brutal indeed.

So far it seems like the purchases will be aimed at dodgy housing-related debt of varying kind, but you can bet there will be pressure to offload corporate and buyout loans that are going bad. The property related debt specified in the proposed bill is residential (AND) commercial.

That alone will limit the Fund’s ability to concentrate solely on residential debt.

And what about personal loans, credit card and car loan debt tied to foreclosures and home equity loans which is another disaster area?

The idea seems to be that the US government will buy at below-market rates and sell for a gain when the housing market recovers: when that will happen, no one is willing to say.

The problem is that the dodgy housing-related assets have proven extremely difficult to value as the demand for them has disappeared.

And there is a nasty message there: those banks and financial groups that stayed away from this sort of toxic debt are being punished. The incompetent and imprudent will be rewarded by being bailed out. This is what moral hazard is all about.

The strong stock-market rally late last week reflects the belief that companies have been saved from the cost of making dodgy decisions on these loans from incompetent and risky decisions to speculate and gear balance sheets to generate big earnings for the company and themselves.

The inevitable death of weaker firms will be delayed, and in turn that will delay the reckoning that must occur before a sustainable economic recovery can take shape.

The US government is seeking to eliminate legal challenges by making the Treasury the sole and final arbiter and not allowing any legal challenges, a move that has upset Americans in the legal field (naturally).

While the proposal calls for the purchase of as much as $US700 billion of bad loans, it’s unknown what taxpayers will ultimately pay for the bailout.

The Bush administration’s proposal requests that the US Congress authorises an increase to America’s debt ceiling.

That’s set to rise to $US10.6 trillion for fiscal year 2009 - which runs from October 2008 through September 2009, to accommodate a Federal Budget deficit already estimated at some $US580 billion.

But now the Administration wants to lift the ceiling to $US11.315 trillion to allow for the purchases of these dodgy mortgage-backed assets.

US commentators say that it’s unclear at this point if it will help homeowners.

If the Treasury buys an entire securitized loan, it could help struggling homeowners by modifying the terms. This could include reducing a loan’s interest rate or principal balance to help prevent foreclosure.

But if it doesn’t buy all the securities. It could be held to ransom by the other holders.

The bottom line remains: if the plan doesn’t stem the tide of foreclosures, home prices will not stabilize and the economy will not recover and banks and other financial groups will still be on death watch.

It will not help them lend more money for housing business, credit cards and the like.

“US super senior ABS CDO net exposures and losses.”

“High grade, Mezzanine, CDO-squared.”

“Sub-prime residential mortgage-backed securities.”

“Alt-A residential mortgage-backed securities.”

“Whole Loans/Conduits.”

We won’t pretend to know what any of those things are. All we know is that for Merrill Lynch [NYSE:MER] it spelled TROUBLE. And as only investment bankers can do, they’ve packaged it all up into a nice bundle and sold it to Bank of America [NYSE:BAC].

That’s providing Bank of America shareholders want anything to do with it. An unintended consequence of this is it may make BofA shareholders take a closer look at their company’s own financials.

We downloaded a copy from the website last night. Shortly afterwards we went home with a headache. After another crack at it this morning this is what we’ve come up with.

All Money and No Sense
Bank of America has offered to buy Merrill Lynch in an all-share deal valued around USD$45 billion. In return it gets everything - good and bad at Merrill’s, including all of Merrill’s 16,500 “financial advisers”, its brokerage revenues and its collateralized debt obligations (CDOs).

This isn’t the first takeover by Bank of America. In fact they have made a habit of it. In the last three years it has bought ABN Amro North America for USD$21 billion in cash. It bought US Trust Corporation for USD$3.3 billion cash. And in January 2006 it bought MBNA Corporation for USD$34.6 billion.

Now it is paying USD$45 billion for Merrill Lynch.

As a shareholder it is good to see an ambitious company grow. It is also good to see a return on the investment. Since the start of 2006 the share price has nearly halved and company profitability has fallen.

Revenue increased from USD$28 billion in 2005 to USD$47 billion in 2007, yet profit only increased from USD$7 billion to USD$9.4 billion.

Bank of America is no small fry themselves when it comes to debt securities. Last week the company presented at a - wait for it - Lehman Brothers [NYSE:LEH] investor conference and proudly explained that BofA has a 17% market share for mortgage backed securities. That’s more than double its previous year’s exposure. And a 21% market share for leveraged loans, a 50% increase on the previous year.

The Murky Grey Knight That Could Make Things Worse
It also has “Criticized utilized exposure.” If there are any bankers out there please drop us a line to let us know what this is. We’ve searched the internet and the only references we can find are all linked back to BofA. It appears to be the only bank that uses the term.

Anyway, its “criticized utilized exposure” is 15.62% of a USD$62 billion commercial real estate loan book. That’s about USD$9 billion. A year previous the “criticized utilized exposure” was only 2.96%. We hate to assume, but surely in this environment an increase to 15.62% isn’t a good thing.

Interestingly, at the BofA earnings conference call in July the only analyst who expressed a concern about the level of the “criticized utilized exposure” was Ed Najarian. Najarian happens to be one of the senior analysts at Merrill Lynch.

Based on what we’ve seen BofA doesn’t look so much of a ‘white knight’ as a murky grey one.

In 1998, Russia’s economy collapsed. The Russian government defaulted on its foreign debt obligations while the ruble went into a freefall.

In Asia, regional governments exhausted their central bank reserves defending overvalued currencies. This all lead to the destruction of credit that began the summer of 1997.

This was exactly the time to aggressively buy emerging markets, and eventually, commodities. Oil prices bottomed north of US$10 a barrel in late 1998.

As we all know, this story changed quickly. Aided by rising prices for commodities, emerging markets went on to post the most impressive gains in the last 10 years. And it’s not surprising.

After all, the emerging markets are home to the world’s fastest-growing economies supported by bulging trade surpluses, booming foreign-exchange reserves and in most cases, healthy balance sheets.

There’s no doubt that in the longer term, emerging markets will become larger and therefore dominate global stock market performance. Growth rates will certainly continue to outpace the major markets for years to come. But a marked slowdown in exports and a prolonged commodity slump might also crimp the near-term prospects for emerging markets.

It is possible that after years of huge triple-digit gains the emerging markets can lag the major markets. That’s especially the case after the crippling declines we’ve seen in the financial stocks. A recovery, however short-lived, will boost the value of U.S. equities because financials comprise more than 15% of the broader market and more than 20% across Europe.

Financials Will Dominate

History strongly suggests that financials will eventually form a bottom and lead another broad rally for major market equities.

It might be hard to make a long-term case for financial services as industry business models have radically changed and have been compromised by the credit squeeze. Still, a major advance in emerging markets can happen even for a short period of time.

I’m certainly not long-term bullish on U.S. or European stock markets. The smart money will remain committed to emerging markets, including new frontier markets like Vietnam, Bangladesh, and Botswana among others. Plus, China, India, and Brazil are superb growth stories for the next 10 years.

But it might be time to start looking carefully again at U.S. stocks as foreigners return to positions that have been severely slumped over the last few years. A stable dollar would go a long way in solidifying this possibility.

This simple solution allows you to be fully compliant while investing without restrictions due to citizenship. It allows you to enjoy full tax deferral under U.S. law, rock solid asset protection, and it serves as a first-class estate planning tool.

It’s known as a foreign variable annuity.

I know that “variable annuity” sounds boring, but it’s one of the most powerful investment tools used by wealthy individuals in their international portfolios.

An annuity allows you to invest freely, shield your assets and even allow your wealth to build up tax-deferred until you withdraw assets.

Plus, your foreign annuity will protect your wealth from the next bank failure in the United States. Not to mention, it gives you the leverage you need to have your money managed by some of the best asset managers and banks in the world.

WASHINGTON - Shares of mortgage finance giants Fannie Mae and Freddie Mac tumbled Monday amid renewed fears that shareholders will wind up with nothing if the government intervenes to bail out the troubled companies.

WASHINGTON - The US Treasury swiftly played down a media report Monday that suggested the government could be poised to extend significant financial aid to the struggling mortgage-finance giants Fannie Mae and Freddie Mac.

WASHINGTON - US federal regulators are working on a stronger label for a widely used diabetes drug marketed by Amylin Pharmaceuticals Inc and Eli Lilly & Co after deaths continue to be reported despite earlier government warnings.

LOS ANGELES - Homebuilders are a little more optimistic about the prospects for home sales over the next six months, but an index reflecting the sector’s confidence overall remained at an all-time low, an industry trade association said Monday.

KERMIT - While most Americans are tightening their belts, scrapping vacation plans and getting rid of their SUVs, in oil-and-gas rich West Texas, folks are living large - again.

LONDON - The Organization of Petroleum Exporting Countries may decide to cut the cartel’s oil output quota as the price of crude risks falling under 100 dollars a barrel, energy consultancy CGES said.

LONDON - Airports operator BAA Ltd says it has successfully completed the refinancing of some STG13.3 billion ($A28.72 billion) of debt just days before Britain’s antitrust regulator is expected to recommend the sale of one or more of its seven airports.

TOKYO - Japan Airlines and All Nippon Airways on Monday announced plans to raise their air fares on some international routes as they struggle to cope with the soaring cost of jet fuel.

ISTANBUL - Turkey’s energy minister says oil flow in the Baku-Tbilisi-Ceyhan pipeline through Georgia might resume soon.

SANTIAGO - Chile’s Central Banks says the nation’s copper sales surged 8.8 per cent in the first seven months of the year over the same year-ago period.

BRUSSELS - Euro nations’ trade deficit with the rest of the world came close to balance in June, the EU statistics agency said.

WELLINGTON - Rising rental income helped the AMP NZ Office Trust (ANZO) lift full year operating profit after current tax 27 per cent to $NZ52.2 million ($A42.7 million).

LOCAL NEWS

CANBERRA - Analysts who expect the key cash rate to be cut next month will be watching with interest when the Reserve Bank of Australia (RBA) releases its August 5 board meeting minutes today.

CANBERRA - Australia should allow East Timorese guest workers into the country, a Timorese government official says.

STOCKS TO WATCH ON THE aUSTRALIAN STOCK EXCHANGE TODAY:

BHP - BHP BILLITON LTD - up 62 cents to $38.60
BHP Billiton , the world’s largest mining company, has reported a record annual profit and says it expects demand for commodities to remain strong. The result was in line with analysts’ forecasts.

BNB - BABCOCK AND BROWN LTD - up six cents to $4.51
BBP - BABCOCK AND BROWN POWER - down 17.5 cents, or 41.18 per cent, to 25 cents
Debt-laden specialist fund Babcock & Brown Power Ltd will book writedowns in fiscal 2008 worth $452 million, sending its securities plunging. Babcock & Brown Power says it would consider options in the event of takeover offers for the entire business.

TLS - TELSTRA CORPORATION LTD - down four cents to $4.38
Telstra’s head of public policy and communications Phil Burgess is leaving the company and will return to the US, due to illness in his family.

IMD - IMDEX LTD - steady at $1.68
Drilling services and products provider Imdex has lifted annual profit by 73 per cent and says it expects revenue in the new year to grow by up to 20 per cent.

ANG - AUSTIN ENGINEERING LTD - up eleven cents to $2.40
Austin Engineering, which provides services to the resources sector, expects further earnings growth this year after delivering a significant rise in profit for 2007/08.

ANN - ANSELL LTD - up 17 cents to $11.40
Gloves and condoms maker Ansell expects higher earnings per share in 2008/09, in the range of 70 US cents to 74 US cents, despite global economic uncertainty and high costs of key inputs such as rubber.

COU - COUNT FINANCIAL LTD - down 0.5 cents to $1.69
Financial planning franchise Count Financial is confident it can improve its net profit in the current year after booking a six per cent dip in its annual bottom line.

SRL - STRAITS RESOURCES LTD - down eight cents to $4.92
Straits Resources will sell its coal interests in Madagascar and Brunei to its Asian subsidiary for $US100.3 million, as part of a previously announced restructure of the group.

SEK - SEEK LTD - up 14 cents to $5.23
Online employment agency Seek has lifted full year profit by 37 per cent, and says it’s confident of improving profitability further in the current year.

BSL - BLUESCOPE STEEL LTD - down 13 cents to $9.00
BlueScope has reported a fall in annual profit after booking one-off charges, but its underlying result lifted as strong global demand for steel raised prices and offset rising raw material costs.

AMP - AMP LTD - $6.75
Rising rental income helped the AMP NZ Office Trust lift full year operating profit after current tax 27 per cent to $NZ52.2 million ($A42.7 million).

MAP - MACQUARIE AIRPORTS - $2.90
Macquarie Airports has been identified by analysts as a potential bidder for airports in the UK should British authorities force current owner BAA Ltd to divest one or more of the seven airports it owns now. BAA owns Heathrow, Gatwick and Stansted in London, Glasgow, Edinburgh and Aberdeen airports in Scotland, and Southampton in southern England.

NEW YORK - Wall Street ended a volatile week with a mixed showing on Friday as worries about credit markets and the economy tempered investors’ upbeat sentiments about falling oil prices.
Investors were encouraged early in the Friday session as oil’s pullback lifted the outlook for consumer companies and eased concerns that record-high energy prices would force Americans to curb spending.
The Dow Jones Industrial Average advanced 43.97 points, or 0.38 per cent, to close at 11,659.90, while the tech-rich Nasdaq composite fell 1.15 points, or 0.05 per cent to 2,452.52.
The broad-market Standard & Poor’s 500 index gained 5.27 points to finish at 1,298.20.

LONDON - Europe’s main stock markets mainly rose on Friday, boosted by Wall Street gains and weak oil futures, but London fell as the mining sector was hit by falling metals prices, analysts said.
The FTSE 100 lost 42.6 points, or 0.77 per cent, to close at 5,454.80 points.

FRANKFURT - The DAX 30 ended 3.81 points, or 0.06 per cent, higher at 6,446.02.

PARIS - The CAC climbed, or 32.71 points, 0.74 per cent, to finish at 4,453.62 points, with trading subdued because of a public holiday in France.

TOKYO - The Tokyo Stock Exchange’s benchmark Nikkei-225 index rose 62.61 points, or 0.48 per cent, to end at 13,019.41.

HONG KONG - The benchmark Hang Seng Index fell 232.13 points, or 1.09 per cent, at 21,160.58.

WELLINGTON - The New Zealand sharemarket rose on Friday as Fletcher Building continued to strengthen following Wednesday’s annual profit result.
The benchmark NZSX-50 index rose 17.23 points to 3351.13.

SYDNEY - The Australian stock market has had a flat lead with New York indices closing mixed on Friday as worries about credit markets and the economy tempered investors’ upbeat sentiments about falling oil prices.
At 0738 AEST, the Sydney Futures Exchange’s September share price index futures contract was down eight points at 4,930.
In news today, miner BHP Billiton Ltd and steelmaker BlueScope Steel are to release their annual results, as are rubber products manufacturer Ansell, online job agency Seek Ltd and online service provider iiNet Ltd.
The Australian share market closed flat on Friday as a rally in banks and property trusts, triggered by a positive US lead, offset falls in mining and energy stocks.
The benchmark S&P/ASX200 index was up 0.6 of a point to 4,981.7, while the broader All Ordinaries index lost 0.1 of a point to 5,038.9.

NYMEX
Oil fell to its lowest price in three months on Friday, briefly touching the $111 level after the dollar muscled higher and OPEC predicted the world’s thirst for fuel next year will fall to its lowest point since 2002.
Light, sweet crude for September delivery fell $1.24 to settle at $113.77 a barrel on the New York Mercantile Exchange after falling to $111.34, its lowest price since May 2 and more than $35 - or 24 per cent - below its July 11 trading record above $147.
As high energy costs force countries around the globe to cut back on consumption, crude prices have plummeted and are now within striking distance of $100 a barrel, a level first reached on February 19.
At the pump, retail gas prices also continued falling, with a gallon of regular shedding about half a penny overnight to a new national average of $3.771, according to auto club AAA, the Oil Price Information Service and Wright Express. Gas peaked at $4.114 on July 17.
Crude fell after the dollar gained strength against the euro on US data showing that industrial output rose more than expected in July.
The 15-nation euro has lost some of its lustre compared to its American rival amid growing evidence that European economies are slowing.
The euro bought $1.4675 in trading Friday, down from $1.4811 late Thursday.

COMEX
Gold for December delivery dropped $22.40 to settle at $792.10 an ounce on the New York Mercantile Exchange, after earlier falling to $777.70, its lowest level since October.
Other precious metals traded mixed Friday. Silver for December delivery shed $1.43 to settle at $12.93 on the Nymex, its lowest close since almost a year ago, while September copper rose 1.65 cents to settle at $3.2925 a pound.

15 2008 - Australasian Investment Review – (AIR)

Suddenly the spectre of inflation no longer hangs over the world: it’s gone, banished by the reversal in sentiment in commodity and financial markets. Banished by fears of recession, which were confirmed overnight with Europe contracting in the second quarter, with Germany and France following Italy into a slump. Oil, copper and gold down, and wheat, corn and soybeans as well it’s been a sea change in sentiment in the past month. Slowing Europe and Japan suddenly mean the US is not alone, so it’s off into the greenback because you’ll be more protected there. Europe moved into a real slowdown in the June quarter,with growth contracting by 0.2%, Germany’s economy contracted by 0.5%. France slowed as well, with the economy falling a surprising 0.3% in the quarter. Growth is still up for the first half after the March quarter saw growth of 0.7%, but the size and speed of the slump was surprising, and emphasised why commodity prices are weakening, along with the euro. Inflation is supposed to have peaked, or is close to peaking; growth is slowing, and so will price pressures as recession bites. That’s why the surge in consumer inflation last month in the US came as a complete shock to the markets. Despite the slump in oil and petrol prices from mid-month onwards, and the rise in the value of the US dollar, the CPI surged by a rather large 5.6%, the highest rate since January, 1991 when the first Gulf War was raging. That compares to an annual 5.1% in the year to June. The CPI rose 0.8% in July, compared to June when it jumped 1.1%, so there was a small slowing. But the surprising news had no impact on interest rates, shares or sentiment. Oil was still easier, gold fell sharply, losing the gains of the day before and copper was lower. Higher food, petrol and energy costs were responsible, despite the drop in oil and petrol prices. Those falls are continuing, that’s why economists believe the CPI will drop sharply this month. Now the older and wiser of those in the market wonder if there’s something more dangerous approaching, along with the slumping global economy: deflation. More of that shortly. All year long, the debate has raged over whether the world faces a greater risk from resurgent inflation or from a deflation, caused by the credit crunch, to match Japan in the 1990s. The fall in commodity prices has, for now, convinced the market that we need not worry about inflation. In the US, the market for government inflation protected bonds (called TIPS) now implies that inflation will average 2.16% over the next decade. That’s the lowest in five years, but is it just as much an overshoot as the upward drive in commodity prices when they peaked midway through last month? What is still clear is that inflation is still with us: from the United States, through Europe and Asia, prices are still rising. Wholesale price inflation is double digit in China (but consumer prices are easing); in the US, Europe and the UK wholesale and consumer price inflation are at levels not seen for more than a decade in some cases.  In Japan this week’s report of a 7.1% jump in wholesale inflation was the steepest rise in 27 years In the eurozone, the consumer inflation hit 4.0% in July; more than double the European Central Bank’s inflation target of 1%-2%. Inflation stands at 3.6% in France, at 4.4% in Britain (its highest level for 16 years) and at its highest level for 12 years in Italy at 4.1% and 11 years in Spain where its running at 5.3%. In Germany inflation hit 3.3%, the highest rate since 1993 and enough to get the old anti-inflationist Bundesbank rolling in its grave. Inflation hit 4.3% in Norway, Eastern Europe it’s 6.7%, while in India it’s running at nearly 12% and in Japan at 1.9%, the highest for more than a decade. In some countries such as Argentina there’s doubt about the declared rate (9.3% there) because of changes to the way the government accounts for and reports inflation. In Thailand it’s running at 27% and higher in Egypt This week China reported a slowing in consumer inflation to 6.3% from 7.1% in June. But core measures which discount food and energy have risen past 2%. Now the point of this international roll call is to make a point: normally it would be enough to see interest rates rising everywhere: in India, the central bank is tightening policy, but apart from the increase at the start of July by the European Central Bank, central banks are holding back, transfixed in the case of the Fed and with the Bank of England by fears of a downturn and fears about inflation. So why then are financial markets (even bond markets) suddenly more relaxed about price pressures and galloping into equities and out of oil and commodities? Relative growth differences between the US, Asia and Europe is the one reason already stated, but the Merrill Lynch’s August fund managers survey provides a second reason. Big international investors no longer fear inflation.They worry more about recession, which they believe will take care of cost pressures.So does that indeed signal a deflationary period of rapidly falling growth and prices?

Here’s what Merrill Lynch concluded this week:

Fund managers’ fears of inflation have all but evaporated to reach their lowest level since the downturn of late 2001, according to Merrill Lynch’s Survey of Fund Managers for August.

Merrills said a total of 193 fund managers participated in the global survey from 1 August to 7 August, managing a total of $US611 billion. A total of 161 managers participated in the regional surveys, managing $US432 billion.

The survey captures an extraordinary reversal in investors’ attitude towards inflation. A net 18% of the 193 respondents expect global core inflation to fall in the coming 12 months.

In June’s survey, a net 33% thought inflation would rise.

A falling oil price and growing evidence of recession have prompted this rethink.

More investors believe that the global economy has already entered recession - 24% of the panel take that view this month compared with 20% in July and 16% in June. During the credit boom, investors urged companies to borrow more, but with the credit crunch biting, they are now concerned about leverage.

The net percentage of investors who believe corporates are under leveraged has tumbled to 9%, down from nearly 40% at the end of 2007.

“The message from investors to corporates is that if we are headed for a recession, they should clean up their balance sheets and prepare a financial buffer,” said Karen Olney, chief European equities strategist at Merrill Lynch.

“As banks de-lever, non-financial corporates will have to wake up to far less flexible world of credit.”

Merrill Lynch found that US assets are indeed back in favour (as it seemed in the Mat survey).

“With the economic downturn spreading to the eurozone and certain emerging markets, investors are starting to view U.S. assets as attractive.

“The net balance of asset allocators overweight U.S. equities stands at 12 percent, its highest level in more than six years.

“Supporting this view is the widely-held belief that the U.S. dollar is undervalued.

“A record net 58 percent say this month that the dollar is undervalued, while a net 71 percent say the euro is overvalued. Investors believe that the U.S. has a better corporate profit outlook and higher quality earnings than the eurozone.”

In Europe, investors are moving from oil to consumer stocks.

“European investors have responded to the fall in the oil price by selling oil producers and buying into discretionary consumer stocks.

“The percentage of European investors overweight oil & gas stocks collapsed to 11 percent in August from 52 percent in July.

“Investors have also significantly scaled back large underweight positions in travel & leisure, personal & household goods and retail companies.

“Technology and media sectors, both with significant exposure to consumer demand, also swung back in favour.

“At the same time, inflation fears among the European panel have fallen to levels even lower than in the Global Survey.

“A net 45 percent of European fund managers expect the region’s core inflation to fall over the next 12 months. In June, 32 percent of the European panel were predicting rising inflation.

“The market appears to have overreacted to a fall in the oil price, and investors have turned a blind eye to second round effects of inflation, such as rising wages,” said Karen Olney. “It will take several months of slowing global growth to be sure that the inflationary dragon has been slain.”

But the Merrill Lynch survey contains a cautionary note.

“One consequence of the recent fall in the oil price has been a rapid unwinding of what the survey has highlighted as a highly-crowded trade: Investors have reduced ‘long’ or overweight positions in energy and started closing underweight positions in financials.

“But have they lost sight of the fundamentals in unwinding this position?”

Merrill Lynch says it believes that the energy sector will continue to be supported by a strong oil price.

The firm forecasts oil at $US119 in the fourth quarter, underpinned by low, real global interest rates.

Francisco Blanch, Merrill’s head of global commodities research, said in a statement with the survey results: 

“While we have started to see some demand for oil curtailed in OECD economies, the economic fundamentals in China and other emerging markets support oil at more than $US$100 a barrel into 2009.”

“Investors have moved to close underweight positions in European financials after second quarter results suggested banks are on the road to improvement.”

But, according to ML’s Stuart Graham, head of European bank equity research, toxic write-downs are coming to an end and banks have completed more than half of their capital raising.

However, although earnings downgrades for banks are well under way, doubts remain about the sector’s ability to bounce back quickly.

“Banks are highly unlikely to see a V-shaped recovery in their share price given the uncertainties in the market,” said Stuart Graham. “Apart from the economic outlook, a key question is how stringent regulators will be in setting new rules to govern banks’ capital ratios. No one yet knows what the appropriate capital structure of the future is.”

After a longer than normal delay, commodity prices have entered a significant correction on the back of slumping global growth and a stronger $US.

Notwithstanding, occasional bounces (such as that seen in the last 24 hours) the downwards correction in commodity prices has further to go over the next six months or so.

The AMP’s Dr Shane Oliver says this is good news for the global growth outlook and for shares generally as it takes pressure off inflation and hence clears the way for lower interest rates.

But it is bad news for resource shares and the $A, as we have seen with its 12 cent fall in a month against the US dollar.

While the correction in commodity prices has further to go, their long-term trend is likely to remain up, he says.

From recent highs oil, gold and copper prices have fallen around 20% and wheat and corn prices are down around 30%.

Of course this has occurred from very high levels, as evident below.

What is driving the slump in commodity prices?

What are the implications?

Is this the end of the commodity bull market or just a correction?

Commodity prices and the global growth cycle

In a normal global economic downturn commodity prices fall in response to slowing economic activity.

This takes pressure off costs and inflation, allowing interest rates to fall which sets the scene for an economic rebound.

This time around has been a bit different. Until a month or so ago commodity prices remained very strong being propelled by still strong growth in the emerging world (notably China), investor demand for commodities as a hedge against a falling $US, and speculative demand made possible by the growth of commodity funds and partly fuelled by investor scepticism with financial assets.

The problem was that the surge in commodity prices, notably for oil, was not only cutting into profit margins and consumer spending power but that it was directly adding to global inflation; this was keeping global central banks far more hawkish than they should have been.

So while the credit crunch meant interest rates should have been falling, in the US and UK and being increased in others (e.g., in Europe and Australia).

The end result has been more global economic pain than would normally be the case.

Back to normal

The past month has started to see commodity prices return to something like their normal relationship with the global growth cycle with sharp falls now becoming evident.

There are several reasons for this.

Firstly, recent data has shown that Japan and Europe are flagging just as badly if not worse than the US. In fact the recent flow of economic indicators suggests that both regions may now be in recession.

This is bad news for the emerging world including China because they will find it harder to divert their exports away from the already weak US.

Secondly, it has become increasingly clear that China, India and other emerging countries are also slowing.

Chinese economic growth looks like being 9 to 10% this year compared to last year’s near 12%.

As a result, Chinese authorities are now starting to back pedal on some of last year’s tightening.

Indian growth is likely to slow back to 7% from 9% last year with aggressive monetary tightening starting to bite.

Growth in Brazil is also likely to slow on rising interest rates.

Thirdly, the slump in share markets as oil went through $US120 a barrel in May and increasing evidence of falling oil demand indicated that the surge in the oil price was starting to “choke off” growth and hence oil demand.

Rising base metal inventories are also starting to become evident. See the chart below.

Fourthly, the realisation that growth outside the US is now slowing faster than that in the US has seen the $US break higher.

This in turn has suddenly removed investor demand for commodities, such as oil and gold, as a safe haven against a falling $US.

The combination of all of these fundamental developments has seen commodity speculators squeezed.

The favourite trade recently was long oil/short banks, but in the last few weeks it has suddenly reversed.

This has forced investors to close their positions, which has only added to the severity of the moves.

A pause, not the end, in the commodity super cycle

China may be slowing but is not about to collapse and the long term demand potential in emerging countries is huge.

China’s copper usage per person is less than half US levels and its oil usage per person is around 10% that of developed countries.

Rising income levels and the increased use of agricultural products for fuel will also see ongoing upwards pressure on agricultural demand.

Just as we have seen in the last six years, supply will struggle to keep up with commodity demand over the long term.

As such, the long term trend in commodity prices is likely to remain up. See the chart below.

In this context the recent pull back in commodity prices should be seen as a correction, but it likely has further to go.

Commodity prices remain well above their rising trend (as evident in the previous chart) and speculative positioning and sentiment regarding commodities is yet to fall back to levels associated with a durable rebound.

More fundamentally the economic news over the next six months is more likely to get worse before it gets better.

The next chart shows the relationship between a leading indicator of world growth (based on the OECD’s leading indicators for OECD countries plus Brazil, Russia, India and China) and commodity prices.

Normally there is a close relationship, but it broke down last year and into mid this year as the leading indicator fell but commodity prices surged.

But a more normal relationship seems to be getting reestablished. As can be seen below, the leading indicator suggests more weakness in commodity prices ahead.

Against this backdrop speculative positions in commodities are likely to be wound back further particularly as the $US now seems to be on a firmer footing relative to other currencies.

In the very short term commodities have become oversold and due for a bounce, but the trend over the next six months or so is likely to remain down.

Implications – the good and the bad

The cyclical down turn in commodity prices now underway has a number of implications

Firstly, the correction in commodity prices is good news for the global economic outlook and share markets generally.

Softer commodity prices will remove much of the pressure on inflation.

This in turn will help global central banks move towards lower interest rates and provide greater flexibility to deal with the ongoing credit crunch.

We expect lower interest rates in Europe, the UK, Japan and Australia over the next six months.

Secondly lower commodity prices will also help reduce corporate cost pressures and provide increased spending power for consumers.

To the extent lower commodity prices make it easier for a healing of the global economy it should be positive for global shares generally.

Thirdly, falling commodity prices are of course bad news for resources shares.

As such, there is potential for a further reversal of their relative out performance versus financial shares over the last year.

See the chart below in relation to Australian resources and financial shares

Given the relative importance of resources in the Australian share market, it is also likely to mean that Australian shares may under perform global share markets for a while yet as the commodity correction continues to run its course.

Asian shares are likely to be key beneficiaries of the correction in commodity prices given Asia’s high reliance on commodity imports.

Fourthly the commodity price downswing means the $A has entered a cyclical correction greater than any of the pullbacks seen in recent years.

While the $A is oversold having fallen 13% in four weeks, and so may have a short term bounce, more downside is likely in the months ahead, possibly to $US0.80.

Parity against the $US has been postponed probably till late 2009 after the commodity cycle turns up again.

And lastly a downturn in traded commodity prices will also dampen the terms of trade boost for the Australian economy, adding to the case for RBA interest rate cuts.

Conclusion

Commodity prices have entered a cyclical correction which looks like running a bit further.

While this is bad news for resources shares, the relative performance of Australian shares and the $A, it’s necessary to clear the way for lower interest rates to combat the credit crunch.

So overall it’s more good news than bad.

More broadly we think that the commodity super cycle remains alive and well, but a sustained resumption of the uptrend in commodity prices probably won’t get underway till some time next year.

NEW YORK - Wall Street receded again on Wednesday after a US Government report on retail sales and a jump in oil prices raised concerns on whether consumer spending could generate economic growth.
The Commerce Department said retail sales slipped 0.1 per cent as rising prices soaked up economic stimulus payments to households. Excluding a big drop in sales of automobiles, retail sales rose 0.4 per cent. But even on that basis, it was the weakest showing in five months.
Wall Street had expected sales to remain flat after a minor increase in June. The report followed a warning from department store Macy’s Inc that its full-year profits would fall short of expectations due to slower sales.
The Dow Jones industrial average lost 109.51 points, or 0.94 per cent to 11,533. The broader Standard & Poor’s 500 index slid 3.76 points, or 0.29 per cent to 1,285.83, while the NASDAQ declined 1.99 points, or 0.08 per cent, to 2,428.62.

LONDON - European stock markets dived on Wednesday after heavy losses in Asia and a dip in early Wall Street trading.
In London, the FTSE 100 index of leading companies lost 85.9 points, or 1.55 per cent, to close at 5,448.6.

FRANKFURT - The Dax plummeted 2.49 per cent, or 163.68 points, to 6,422.19.

PARIS - The CAC 40 dropped 2.56 per cent, or 115.51 points, to 4,402.97.

TOKYO - Japan share prices closed down 2.11 per cent, hit by renewed worries about the health of the world’s top banks and news of a contraction in the domestic economy. Exporters’ shares suffered after the US dollar fell back below the 109 yen level, dimming prospects for Japanese companies’ overseas earnings.
The Tokyo Stock Exchange’s benchmark Nikkei-225 index lost 280.55 points to end at 13,023.05.

HONG KONG - Hong Kong shares closed down 1.6 per cent, falling for a fourth consecutive day on renewed credit worries.
The benchmark Hang Seng Index dropped 347.57 points to 21,293.32.

WELLINGTON - New Zealand shares closed down 0.25 per cent Wednesday, with volatile trading in third-ranked Fletcher Building after it announced annual profit just above expectations, but that the outlook remained uncertain.
The benchmark NZX-50 index fell 8.39 points to 3,345.235.

SYDNEY - The Australian stock market is expected to open lower following falls on Wall Street, although at 0750 AEST the Sydney Futures Exchange’s September share price index futures contract was just four points down at 4,910.
In economic news today, the Australian Bureau of Statistics releases average weekly earnings data for the May quarter, and Westpac and the Melbourne Institute release their index of consumer inflation expectations.
Annual results are due from ASX Ltd, Leighton Holdings Ltd, Futuris Corp Ltd and Stockland Ltd.
PMP Ltd will release interim results, and retailer David Jones will issue fourth quarter and full year sales figures.
The Retail Financial Services Forum enters day two of three, at Sydney’s Darling Harbour.
In Sydney, Macquarie Communications Infrastructure Group chief executive Scott Davies addresses the American Chamber of Commerce in Australia.
The Australian share market closed lower on Wednesday, largely attributable to volatility returning to the US financial sector.
The benchmark S&P/ASX200 index dropped 102 points to 4,951.6, while the broader All Ordinaries fell 94.4 points to 4,995.9.

NYMEX

Crude oil futures rose more than $2 a barrel after a US Energy Department report showed a bigger-than-forecast decline in inventories of gasoline as refiners shut units and imports fell.
Gasoline supplies dropped 6.39 million barrels to 202.8 million barrels last week, the biggest decline since October 2002 when Hurricane Lili and Tropical Storm Isidore disrupted output along the Gulf of Mexico.
Crude oil for September delivery rose $2.99, or 2.6 per cent, to settle at $116 a barrel on the New York Mercantile Exchange, the biggest one-day gain since July 30. Futures touched $112.31 yesterday, the lowest since May 2.

COMEX

Gold rose for the first time this month on speculation a 12 per cent decline since the end of July that had erased this year’s gains was exaggerated. Silver also rose.
The rebound capped eight straight losing sessions, and came after the price touched $808.60 an ounce yesterday, the lowest since December 21.
Gold futures for December delivery rose $16.90, or 2.1 per cent, $831.50 an ounce on the Comex division of the New York Mercantile Exchange, after earlier touching $836.40.
Gold’s rally is the biggest percentage gain for a most-active contract since June 26.
Silver futures for September delivery jumped 36 cents, or 2.5 per cent, to $14.845 an ounce on the Comex.
Silver has declined 0.5 per cent this year while gold has dropped 0.7 per cent.

NEW YORK - US stocks closed modestly higher today as falling oil prices eased inflation fears and the market shrugged off an escalating deadly conflict between Russia and Georgia.
The Dow Jones industrial average rose 48.03, or 0.41 per cent to 11,782.35, after the blue chips’ 302-point jump on Friday.
The Standard & Poor’s 500 index rose nine, or 0.69 per cent to 1,305.32, while the NASDAQ rose 25.85, or 1.07 per cent to 2,439.9.

LONDON - Europe’s major stock markets gained ground on Monday, boosted by the weakening euro against the dollar, and as traders monitored escalating violence between Russia and Georgia.
In London the FTSE 100 index added 52.6 points, or 0.96 per cent, to close at 5,541.80.

FRANKFURT - The Dax ended 47.98 points higher, or 0.73 per cent, at 6,609.63.

PARIS - The CAC 40 rose 46.64 points, or 1.04 per cent, to 4,538.49.

TOKYO - Japanese share prices closed up 1.99 per cent on Monday supported by gains on Wall Street, a fresh fall in the cost of crude oil and a weaker yen, which is good for exporters.
The Tokyo Stock Exchange’s benchmark Nikkei 225 index rose 262.50 points to end at 13,430.91.

HONG KONG - Hong Kong share prices closed down 0.12 per cent on Monday, holding up despite a plunge in the Shanghai bourse.
The benchmark Hang Seng Index dropped 25.87 points to 21,859.34.

WELLINGTON - New Zealand shares closed up 0.37 per cent on Monday as investors took heart from a strong close on Wall Street at the end of last week.
The benchmark NZX 50 index rose 12.37 points to 3,370.19.

SYDNEY - The Australian stock market is expected to open marginally higher today after the return of volatility on Wall Street overnight, with all three major US indices see-sawing their way to positive closes.
At 0748 AEST, the Sydney Futures Exchange’s September share price index futures contract was 19 points higher at 5,040.
On the agenda today, National Australia Bank Ltd releases its monthly business survey for July, and a St George Bank Ltd provides an operational briefing.
In equities, Cochlear Ltd and WorleyParsons Ltd are to release annual results.
Dexion Ltd, APN News & Media Ltd and Australian Agricultural Co Ltd are to release interim results, and Optus parent Singapore Telecommunications Ltd is to provide results for the first quarter.
Adelaide Resources is having a general meeting.
The Australian share market closed up over half a per cent on Monday.
The benchmark S&P/ASX200 index rose 39.9 points to 5,026.1, while the broader All Ordinaries rose 31.7 points to 5,069.3.

NYMEX
Crude oil prices sank Monday as the market worried about weakening demand, particularly in the eurozone and China, after Chinese oil imports fell sharply.
New York’s main contract, light sweet crude for September delivery, fell 75 cents to close at $US114.45 a barrel.
The contract hit an intraday low of $US112.72, its lowest level since May 2.
In London, Brent North Sea crude for September delivery slipped 66 cents to settle at $US112.67. Its session low was $US111.07.
Fears of recession in the eurozone gained momentum on Monday after official data showed a sharp fall in French industrial production in June.
The market particularly focused on news that oil imports to China, the world’s second-thirstiest oil importer after the United States, fell seven per cent in July, the steepest decline since December.
Oil prices also fell as the US dollar strengthened, which makes dollar-priced commodities more expensive for buyers with weaker currencies.

COMEX

Energy and metals prices fell again, widening last week’s sharp losses as the dollar regained more ground against other major world currencies.
The metals markets also saw big sell-offs last week, with gold dropping 5.7 per cent, silver declining 12.5 per cent, and copper losing 6.9 per cent.
Precious metals sank again in trading Monday, as the US dollar moved higher against the euro and pound.
Gold for December delivery lost $US36.50 to settle at $US828.30 an ounce on the NYMEX. Silver for September delivery fell 71 cents to settle at $US14.62 an ounce on the NYMEX.
In base metals, September copper fell 4.13 cents to settle at $US3.2915 a pound.
Grain prices finished mixed Monday in trading made erratic by speculative buying ahead of Tuesday’s crop report from the US Department of Agriculture.
Wheat and soybean prices jumped, but corn finished lower, dragged down by a selloff in crude oil prices.
Because corn is the main ingredient in ethanol, its price is often affected by the energy markets.

NEW YORK - US stocks rallied strongly Friday with the Dow Jones Industrial Average rocketing 302 points as world oil prices dived, soothing fears that fresh inflationary pressures could further depress an already ailing economy.
The rising US dollar also helped to suppress oil prices, boosting optimism as the euro fell under $US1.50 dollars for the first time since February.
The Dow soared 302.89 points, or 2.65 per cent to close at 11,734.32. The broader market Standard & Poor’s 500 index rose 30.25 points, or 2.39 per cent to 1,296.32. The technology-heavy NASDAQ leapt 58.37 points, or 2.48 per cent to 2,414.10.

LONDON - Europe’s main stock markets closed higher on Friday, with a fall in oil prices and buoyant trading on Wall Street outweighing the influence of gloomy economic news from Italy.
In London, the FTSE 100 index added 11.7 points, or 0.21 per cent to close at 5,489.20.

FRANKFURT - The Dax ended up 18.16 points, or 0.28 per cent, higher at 6,561.65.

PARIS - The CAC 40 rose 34.42 points, or 0.77 per cent to 4,491.85.

TOKYO - Japan shares closed up 0.33 per cent on Friday, rebounding from early losses as investors were encouraged by a weaker yen which helps exporters.
The Tokyo Stock Exchange’s benchmark Nikkei 225 index rose 43.42 points to end at 13,168.41.

HONG KONG - Hong Kong shares closed down 0.99 per cent on Friday as worries over the US sub-prime crisis and a decline in China-listed shares hit stocks.
The benchmark Hang Seng Index was down 218.99 points at 21,885.21.

WELLINGTON - New Zealand shares closed down 0.62 per cent Friday as disappointment over market leader Telecom’s annual results and a generally grim outlook dragged the broader market down.
The benchmark NZX 50 index fell 21.07 points to 3,357.82.

SYDNEY - The Australian stock market is expected to open higher today after the Wall Street lifted more than 302 points on Friday night.
At 0745 AEST, the September share price index futures contract on the Sydney Futures exchange was 72 points higher at 5,034.
Today’s events include the Reserve Bank of Australia’s quarterly statement on monetary policy and the Australian Bureau of Statistics’ lending finance data for June.
The Housing Industry Association of Australia will release its national and state outlook for the June quarter, and the Australian Office of Financial Management (AOFM) will announce tender results for $600 million of 6.25 per cent June 2014 bonds.
Crane Group Ltd, United Group Ltd and Bendigo and Adelaide Bank Ltd all are scheduled to release preliminary results for 2008.
The Australian share market closed marginally firmer on Friday as trading consolidated following the previous day’s financial sector run.
The benchmark S&P/ASX200 index rose 2.9 points to 4,986.2, while the broader All Ordinaries rose 7.6 points to 5,037.6.

NYMEX
Oil prices plunged to $US115 a barrel on Friday, driven lower by a jump in the US dollar, signs of moderating global demand and a growing belief that commodity prices may have peaked.
Investors pulled their money out of commodities and put it back into stocks, leaving crude oil with a week’s loss of nearly $US10 a barrel and driving the Dow Jones industrial average up more than 300 points.
Light sweet crude for September delivery fell $US4.82 to settle at $US115.20 a barrel on the New York Mercantile Exchange - its lowest settlement since May 1 when it settled at $US112.52.
During Friday trade, crude dipped as low as $US114.90. Prices for gasoline, heating oil and natural gas also dropped.
In London, Brent crude for September delivery fell $US4.53 to finish at $US113.33 a barrel.
Some analysts have pointed to the $US117 a barrel mark for crude oil as significant, arguing that a move below that level would suggest that oil’s recent slide is more than a brief pullback.
Crude is now $US32 off its high of $US147.27 on July 11.
By the energy market’s close, the euro had dropped to $US1.5007, while the dollar also rose to 110.22 yen. The British pound fell to $US1.9193, after reaching its lowest point since November 2006.
The weak dollar had been boosting oil prices earlier this year, because dollar-denominated commodities are often used as hedges against inflation and a falling US currency.
NYMEX front-month crude futures are down nearly 22 per cent from their record high. They are still up however nearly 60 per cent from a year ago.
Heating oil futures fell 10.56 cents to finish at $US3.1280 a gallon, while gasoline futures fell 11.53 cents to close at $US2.8874 a gallon. Natural gas futures fell 32.3 cents to settle at $US8.248 per 1,000 cubic feet.

COMEX
In precious metals, gold prices fell to an almost two-month low
after the US dollar strengthened against the euro which diminished the metal’s appeal as an inflation hedge.
Gold futures for December delivery fell $13.10, or 1.5 per cent, to $864.80 an ounce on the Comex division of the New York Mercantile Exchange.
The price is down 6.3 per cent since July 31.
The last time the metal plunged six straight sessions was June 6 to June 14, 2006, when the price dropped 13 per cent.
Silver futures for September delivery fell 92.7 cents, or 5.7 per cent, to $15.33 an ounce, after earlier shedding as much as $1.002.
Before today, silver gained 9 per cent this year, while gold advanced 4.8 per cent.
September copper fell 0.088 cent to settle at $US3.33 a pound.

NEW YORK - Wall Street sank after weak readings on economic growth and the job market. The Dow Jones industrial average fell more than 200 points.
The Commerce Department reported that gross domestic product grew 1.9 per cent in the second quarter. Economists polled by Thomson Financial/IFR had expected growth of 2.4 per cent.
The Dow lost 224.64, or 1.93 per cent, to 11,431.43.
The Standard & Poor’s 500 index shed 23.12, or 1.79 per cent, to 1,266.07, and the NASDAQ fell 22.64, or 0.95 per cent, to 2,355.73.

LONDON - Europe’s main stock markets closed mixed on Thursday, with attention focused on interest rate decisions in Britain and the eurozone, highlighting the dual threats of inflation and recession. Both central banks kept rates on hold.
The FTSE 100 index shed 8.6 points, or 0.16 per cent, to close at 5,477.50.

FRANKFURT - The Dax lost 17.9 points, or 0.27 per cent, to finish at 6,543.49.

PARIS - The CAC 40 rose 9.1 points, or 0.20 per cent, to 4,457.43.

TOKYO - Tokyo share prices closed down 0.98 per cent on Thursday as investors took profits after the previous day’s surge amid renewed pessimism over the local and US economies.
The Tokyo Stock Exchange’s benchmark Nikkei-225 index lost 129.90 points to end at 13,124.99.

HONG KONG - Hong Kong share prices closed up 0.7 per cent on Thursday as worries over the local earnings outlook kept investors from celebrating Wall Street’s two-day rally.
The benchmark Hang Seng Index was up 154.45 points to 22,104.20.

WELLINGTON - New Zealand shares closed up 0.79 per cent on Thursday, but off their peak as the market trended down following a solid start.
The benchmark NZX-50 index rose 26.55 points to 3,378.89.

SYDNEY - The Australian stock market is expected to open lower today as recent US optimism ebbed and oil reversed its recent decline.
At 0732 AEST, the September share price index futures contract on the Sydney Futures exchange was 58 points lower at 4,917.
Today’s events include annual results from Telecom NZ and Programmed Maintenance Services holds its annual general meeting.
Westpac will deliver a market update while, in Melbourne, ANZ and Bankwest will appear before the House of Representatives Economics Committee’s inquiry into competition in the banking and non-banking sectors.
AngloGold Ashanti Ltd chief executive Mark Cutifani will address the Melbourne Mining Club.
The Australian share market closed marginally firmer yesterday, with the banking sector gaining ground.
The benchmark S&P/ASX200 index was up 14.2 points, or 0.29 per cent to 4983.3, while the broader All Ordinaries climbed 11.9 points, or 0.24 per cent to 5030.

NYMEX
Oil prices jumped back above $US120 a barrel on Thursday, halting a steep three-day slide after Kurdish rebels claimed responsibility for a fire at Turkish pipeline that supplies Western countries.
Light, sweet crude for September delivery rose $US1.56 to settle at $US120.02 a barrel on the New York Mercantile Exchange, after prices swung between positive and negative territory.
Gasoline futures also rose, while heating oil and natural gas futures finished lower.
Crude had tumbled more than $US6 over the previous three days, bringing prices $US30 lower than the July high above $US147 a barrel.
Before Thursday’s rally, Nymex front-month crude futures had fallen around 20 per cent, or about $30. The decline comes amid mounting evidence that high energy prices are forcing Americans to cut back on driving.
The US Energy Department’s Energy Information Administration said on Wednesday that crude supplies rose 1.7 million barrels in the week ended August 1, while inventories of distillate fuel - which include diesel and heating oil - jumped 2.8 million barrels.
Meanwhile, EIA data showed gasoline stockpiles fell 4.4 million barrels last week, much more than the 1.4 million drop expected by analysts.
The market also was eyeing more tension over Iran’s nuclear program.
In other Nymex trading, heating oil futures slipped 0.43 cent to finish at $US3.2336 a gallon, while gasoline prices rose 5.34 cents to settle at $US3.0027 a gallon. Natural gas futures fell 20.2 cents to settle at $US8.571 per 1,000 cubic feet.

COMEX
Gold fell for a fifth straight session, the longest losing streak since June 2007, as a rebound in the dollar eroded its appeal as an alternative investment. Silver fell, too.
Gold futures for December delivery fell $5.10, or 0.6 per cent, to $877.90 an ounce on the Comex division of the New York Mercantile Exchange. Earlier, the price gained as much as 1.1 per cent. The metal last fell for five straight sessions from June 4 to June 8, 2007.
Silver futures for September delivery fell 24.8 cents, or 1.5 per cent, to $16.257 an ounce on the Comex. Silver still has gained 9 per cent this year, while gold advanced 4.8 per cent.