Markets: The New Year Rally Snuffed Out

Europe's 2011 woes returned from their Christmas holidays earlier than expected thanks by the Standard & Poor's ratings downgrades and investors here and offshore will have to be very careful.

Equities and commodities, especially gold, are going to do it tough while markets work through the implications of the rating cuts: the first and possibly most important outcome is to make defending the eurozone via the so-called 'firewalls' even harder.

That will increase volatility and fears about the future of the euro and the zone.

As a result, the euro will continue to be weak; the US dollar will strengthen.

But don't expect the Australian dollar to undergo its usual sell down as a result: the Aussie is now being seen in a different light by more and more big investors.

With France and Austria losing their AAA ratings at the weekend, Australia is now only one of 14 economies around the world with the top credit rating.

That means some investors will have to switch from euros into Aussie dollars and other currencies (such as the Canadian dollar and the greenback).

That in turn means we will be stuck with a strong dollar for some time to come.

The Aussie currency has already risen against both the euro and the US dollar since the start of December, despite the euro losing 6% or more against the greenback.

(Normally when the US dollar rises against the euro, the Australian dollar falls, but that hasn't happened.)

Our dollar is now viewed increasingly by investors offshore as a haven of value; hence the sharp fall in market interest rates here in the past eight months as foreign central banks and other investors buy bonds and other high ranking assets to diversify their holdings away from the euro and the greenback.

When trading finished early Saturday, our time, the dollar was at $US1.0320, unchanged from the local close.

That was despite the US currency rising to a new 16 month high against the euro of well under $US1.27.

The Australian dollar hit new highs against the euro and finished around 81.4 euro cents.

It finished around 79.3 yen, up sharply from the start of December when it was trading around 76 yen.

The Australian sharemarket will open cautiously today after the downgrades and because the US market is closed tonight for a holiday.

Share price futures fell 17 points at 4163 points.

That was after the market hit five-week highs on Friday, with the ASX200 rising 14.9 points, or 0.4%, to 4195.9 and the All Ordinaries adding 0.4% to 4255.4 points.

For the week, the two indexes gained a healthy 2.1%, but on low volumes because of the holiday break.

In the US, the Dow dropped 48.96 points, or 0.4%, to 12,422.06.

The Standard & Poor's 500 Index lost 6.41 points, or half a per cent, to 1,289.09, while the Nasdaq Composite Index fell 14.03 points, or 0.51%, to 2,710.67.

For the week, the Dow rose 0.5%, while the S&P 500 gained 0.9%, and the Nasdaq added 1.4%.

So far this month the S&P 500 is up 2.5%, while the Dow is up 1.7% and the Nasdaq is up 4.1%.

Elsewhere in Asia, the MSCI Asia Pacific Index rose a solid 2.2% last week, its fourth weekly gain in a row.

On Friday, Japan's Nikkei Stock Average ended up 1.4% to 8,500.02, South Korea's Kospi gained 0.6% to 1,875.68 and Hong Kong's Hang Seng Index ended up 0.6% to 19,204.42. China's Shanghai Composite Index dropped 1.3%.

For the week Hong Kong was up 3.3% for a second week, and the Shanghai market bounced back with a solid 3.8% advance as investors liked the latest Chinese economic data which will be updated further today and tomorrow.

Tokyo was up 1.3% for the week, South Korea, 1.8% and India's Sensex was also up 1.8%.

In Europe the Stoxx Europe 600 Index rose 0.7% to 249.18 last week, after a small 0.1% drop on Friday as those concerns spread about the impending rating downgrades.

Bloomberg said indexes rose in 13 of the 18 western European markets. France's CAC 40 climbed 1.9% and Germany's DAX advanced 1.4%, while the UK's FTSE 100 Index fell 0.2%.

Gold fell as the greenback advanced, as did the price of oil on Friday.

Gold in fact lost 1% in New York futures trading (around $US16).

Other metals also closed lower. Copper jumped 5.8% for the week after what were seen as solid Chinese economic figures.

Comex February gold ended down $US16.90 an ounce, or 1%, at $US1,630.80 an ounce.

Gold futures prices had risen 2.5% in the three sessions ended Thursday and closed the week up 0.9%.

Comex silver for March delivery lost 60 cents, or 2%, to end at $US29.52 an ounce.

Silver rose 3% in trading on Thursday which allowed it to post a 3% gain for the week.

March copper lost a cent on Friday in Comex trading to close at $US3.64 a pound.

The metal, which is highly correlated to economic growth expectations, rallied for the week, and had its best week since early December.

And Friday saw oil futures dip further under the $US100-a-barrel mark in New York as talk of an Iranian oil embargo eased and news of the impending credit rating downgrades spread.

Nymex February futures of West Texas Intermediate eased 40c, or 0.4%, to end at $US98.70 a barrel.

In London, Brent oil for February settlement dropped 68c, or 0.6%, to $US110.58 a barrel.