Australian Stock Market Report – Afternoon 5/18/2012

MARKET CLOSE
(4.30pm AEST)

Today certainly was not an enjoyable day for those involved in markets. The All Ordinaries Index (XAO) slumped by 2.6 pct or 109.7 pts to 4098.8. Almost all sectors ended in the red today, with the mining and financial sectors the worst performers. Today was the biggest daily pullback for the ASX in 2012 and the worst weekly performance (down 5.6 pct this week) since September 2011. Australian shares wiped out all of the market's gains for the year in a matter of days.

One of the big three ratings agencies, Moody's cut the credit ratings of 16 Spanish banks including Banco Santander which is one of Spain's biggest banks. This came just days after it downgraded 26 Italian banks. The downgrades are due to both economies slipping back into recession, the ratings agency not expecting conditions to improve this year and a rise in bad loans.

The market is also concerned with the political uncertainty in Greece, with investors having to wait at least a month to find out the result of the Greek Presidential elections. The Greeks are expected to return to the polls on 17 June. Keep in mind that Greece only makes up around 2.5 pct of the Eurozone economy. Despite this, the potential exit of Greece has created concerns of what it would mean for the future of the Eurozone. In the event of a Greek exit from the Euro area, it would need to return to the Drachma and significantly devalue its currency (by as much as 70 pct). This means that its currency would be worth less but its debts stay the same. Investors are concerned with the potential impact of this on other Eurozone nations such as Portugal Ireland, Italy and Spain.

The world's largest miner and the biggest company on the local sharemarket, BHP Billiton (BHP) fell by 4 pct or $1.31 to $31.46 and hit its lowest level since March 2011. The smaller Rio Tinto (RIO) performed even worse, down 5.09 pct or $2.96 to $55.20 while Fortescue Metals Group (FMG) also slumped by 5.09 pct or 25 cents to $4.66. FMG has fallen by a staggering 14 pct this week.

The big four banks also did it tough, with National Australia Bank (NAB) down 4.23 pct or $1.03 to $23.32. The other three majors dropped by between 3 pct and 3.8 pct.

It wasn't all bad news however, with the gold producers gaining strongly. Newcrest Mining (NCM), Australia's largest gold miner rose by 3.82 pct or 92 cents to $25.03 while the smaller players also rallied.

No major economic data was released in Australia today, but it certainly has been a busy week on the economic front. In the middle of the week, the latest consumer confidence and wage price index was out.

Consumer sentiment improved for the first time in three months by 0.8 pct, but is still around 8 pct lower than this time last year. The report is released on a monthly basis by Westpac and compiled by conducting a survey of around 1,200 consumers asking a variety of questions on topics such as employment and expected future economic conditions.

Commsec Economist, Savanth Sebastian said that "The Reserve Bank would have hoped that the deep rate cut would have provide a positive shock to confidence and be a catalyst to drive activity but in the short-term it is yet to have the desired effect. And while the latest result doesn't bode well for retailers (who have been facing tough trading conditions for some time, the budget handouts begin in earnest this week, with $110 per child to be distributed to households - a result that should support near term activity."

The Wages Price Index rose by 0.9 pct in the previous quarter as expected. This measures the change in the price both businesses and government pay for labour (not including bonuses). The index is considered to be a leading indicator of consumer inflation (if businesses are paying more for staff, the cost is likely to be passed on to the consumer.)

Mr Sebastian said that "It is the perfect outcome. Wages are still rising at a faster pace than underlying inflation. So the modest real wage gains are serving to support spending. More importantly, inflationary pressures are under control and given that the job market is going sideways, it is likely that growth in wages over the coming year will remain balanced. The Reserve Bank has identified labour costs and productivity to be the two hot button issues to watch. And while wages have been contained there is no doubt that productivity has been weak. However the combination of continued economic growth and a flattening of the job market suggest that productivity may have picked up in recent months. The tame growth of wages keeps the door open for another rate cut. Most likely this would occur at the August Board meeting, but if the European situation was to deteriorate markedly in the next few weeks, an earlier rate cut couldn't be ruled out."

On Tuesday, the RBA minutes were out and provided little in the way of additional hints into expectations for rates. With inflation under control and expected to remain within the 2 pct to 3 pct target range however, interest rates are likely to be cut by 0.25 pct in August this year. This would take rates to 3.5 pct, its lowest level since November 2009.

Commsec Economist, Savanth Sebastian said that "Interestingly the Reserve Bank spent time discussing the weakness in housing activity. The Reserve Bank is well aware of the importance of home construction in driving domestic growth. And the lack of new building and ongoing decline in house prices is a clear dampener on overall activity. In addition while the Reserve Bank believed that the fundamentals for housing remains strong, the Minutes highlighted that there was "little prospect of an imminent recovery in housing construction". In effect providing the Reserve Bank with further validation to provide a deeper rate cut."

Next week will be extremely quiet on the economic front in Australia with the skilled vacancies report out on Wednesday.

No major economic news was issued in the Asia-Pacific region today. It will also be a quiet session in both the U.S and Europe, with no major data scheduled for release. The G8 meeting will take place tonight however.

One thing to look forward to however will be the listing of Facebook shares (FB;us) on the NASDAQ in the U.S at 1am (AEST). Facebook's 421 million shares were priced at $38 a piece last night, valuing the social media giant at US$104 billion. This is more than any other American company on its listing day. The company has raised US$16 billion, which is the second most in history behind only Visa. FB generates almost all of its revenue from advertising.

Volume of shares traded came in at 2.0 billion today, worth $5.98 billion. 226 shares were up, 841 were weaker and 332 ended unchanged.

At 4.30pm AEST on the Sydney Futures Exchange, the ASX24 futures contract is up 0.34 pct or 14 pts to 4072.

Due to daylight savings, most major European markets are now trading between 5pm (AEST) and 1.30am (AEST). Stocks are expected to open in the red tonight.

Dow Futures are down, indicating that U.S stocks could open lower tonight. Due to daylight savings taking place in the second week of March in North America and the end of daylight savings in Australia, U.S markets will now be trading between 11.30pm (AEST) and 6am (AEST).

Turning to currencies, the Australian dollar (AUD) is trading below parity against the greenback for the fifth consecutive day and buys US98.3 cents. The AUD is currently trading at £62.3 pence and €77.6 cents. The AUD fell by 2 cents over the week.

Australia is a commodity based economy, with coal and iron ore accounting for around half of everything we export overseas. In essence, when the going gets tough globally, there is fear of less demand for our commodities, which tends to result in a weaker AUD.

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