Markets: US Rating Cut, Australian Outlook Solid

So the biggest questions about the impact of the S&P downgrade of America's credit rating are: the impact on the share market here and offshore today and tonight, and how many dominoes will fall as the rating cut impacts on the emerging crisis of confidence.

The downgrade surely won't help - but it's just one more factor at the end of a very nervy week for investors large and small that saw an estimated $US2.5 trillion wiped off stockmarket values around the world.

Hundreds of billions dollars of value were lost in commodity and other markets, although hundreds of billions more were added as bond prices in countries from Australia to Germany, Britain and Germany jumped.

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An early reaction came in the Gulf at the weekend with the small Saudi stock exchange falling 5.6% on Saturday after news of the S&P downgrade became public.

The Financial Times reported late yesterday that finance ministers and officials were involved in hastily arranged conference calls last night, our time to discuss the twin debt crises in Europe and the US.

Friday's controversial move by S&P to cut America's credit rating by one grade from triple A to double A plus has added urgency to the discussions with both the European Central Bank policy-setting council and the Group of 7 finance ministers expected to hold talks before the Asian markets open on Monday.

Deputy finance ministers from the Group of 20 spoke overnight on Saturday.

Australian and NZ markets will take the brunt this morning, followed by the rest of Asia.

But local investors should heed the International Monetary Fund which said in the weekend that Australia is well placed to limit the impact of any disruption caused by worsening international economic conditions.

"If global financial markets become severely disrupted or world growth falters, macroeconomic policy is well positioned to respond.

"The exchange rate would likely depreciate, limiting the fall in commodity prices in Australian dollars and providing stimulus to the non-commodity tradable sector.

"There is ample scope to cut the policy interest rate and provide liquidity support for banks, which proved effective in the global financial crisis.

"There is also fiscal space to delay the return to surplus and, if needed, to take temporary discretionary measures, given the low level of government net debt (6 percent of GDP)," the Fund said in its statement.

That's if there is a global slowdown.

Absent that risk, the Fund says Australia's economic outlook is favourable, with activity "expected to bounce back in the second quarter" of this year.

"We project real GDP growth of 2 percent for calendar year 2011 and 3.5 percent in 2012 on the back of strong demand for commodities and private investment in mining and liquefied natural gas," the IMF said in the statement which came at the end of the annual consultation with Australian Government and Reserve Bank officials.

"We expect employment to grow at a slower pace than in recent years but the unemployment should remain below 5 percent in 2011 and 2012."

The country's external current account deficit is expected to narrow to 1% of GDP in 2011 before "progressively widening to about 6.5 percent of GDP in the medium term," the IMF said.

The Fund said the risks to Australia's economy are "broadly balanced":

"An upside risk is that investment in the resource sector could be larger than expected, boosting growth and adding to inflation pressures.

"On the downside, a key risk is that the global recovery stalls or Asian growth falters, impacting demand for commodities."

That sound like the RBA in its latest Statement of Monetary policy, released on Friday.

In that, the RBA cut its forecast for growth in 2011 to an average of 2% from the May estimate of 3.25%.

It increased its estimate for the increase in 2012 gross domestic product to 4.5% from 4.25%.

Inflation was projected to rise as well.

The Australian dollar is perhaps the best indicator of global unease impacting on Australia (the stockmarket is too volatile to be an accurate guide).

The Aussie steadied in latest trading offshore Friday night to end at $US1.0442, down over 6c on the week, thanks to the global sell-off and the RBA's decision not to increase interest rates, and then Friday's cut in its growth forecasts for this year.

The Australian dollar hit a record $US1.108 last week and at one stage traded well under $US1.04.

The US dollar rose, eased and closed lower against the euro and the yen as rumours of the S&P rating cut moved through financial markets in the US in late trading.

For the week, the ASX200 index ended down 171.1 points, or 4%, at 4,105.4 while the All Ordinaries index lost 183.2 points, or 4.2%, at 4,169.7.

Both indexes are at two-year lows.

All of the market's top 100 shares ended lower for the day on Friday.

Among the major ones, investment bank Macquarie Bank was down 7.2%, while BHP Billiton lost nearly 5%, David Jones shed another 5.7% and the Commonwealth Bank 'only' lust 2.7% ahead of its full year profit report this Wednesday.

By the close Friday night in London, BHP had fallen 14% and Rio Tinto shed 16% over the week, the latter's 30% interim profit rise not impressing investors.

In Asia markets lost heavily on Friday, with Hong Kong's Hang Seng Index diving 4.3% to 20,946.14, Japan's Nikkei Stock Average losing 3.7% at 9,299.88, Taiwan's Taiex plunging 5.6% to 7,853.13, Australia's ASX 200 index down 4% to 4,105.4 and South Korea's Kospi off 3.7% to 1,943.75.

For the week, the MSCI Asia Pacific Index slumped 7.8% to 126.08 for its biggest weekly loss since October 2008.

That pushed the index down by more than 10% from its May 2 high this year, and into correction territory, like all other major economic regions around the globe.

The session erased more than $136 billion in market value of companies listed on Japanese stock exchanges, according to Marketwatch.

The Hong Kong stock exchange lost more than $US132 billion in investor wealth, with the two main Chinese stock exchanges losing more than $US84 billion.

In Australia, the toll topped $US62 billion and the Taiwanese market shed more than $US48 billion.

That's around $US464 billion in total.

Friday's performance left Tokyo with a 5.4% loss for the Nikkei, Taiwan's benchmark index with a net weekly loss of more than 9%, which was followed closely by an 8.9% decline for the Kospi and that 7.2% tumble for Australia's ASX 200.

Oil, copper and gold ended lower to mixed on Friday in New York trading.

Comex December gold lost $US7.20, or 0.4%, to $US1,651.80 an ounce, a quiet end to what was another week of trading strewn with record highs.

Despite Friday's easing, gold rose 1.3% last week.

Comex silver for September delivery fell $US1.22, or 3.1%, to $US38.21 an ounce. For the week silver lost 1.4%.

Comex September copper futures shed a massive 11.5 USc on Friday, or 2.8%, to close at $US4.117 a pound in New York.

The metal lost 8.1% last week.

Nymex September oil futures added 25c, or 0.3%, to $US86.88 a barrel on Friday.

That's a loss of 9.2% for the week and came after it lost 4.2% the week before.

In London Brent crude rose $US2.12, or 2%, to $US109.37 a barrel.

Despite that rise, Brent fell 6.3% last week.

News of the S&P downgrade of the US came after Wall Street market dealings had finished for the week, so the impact on the US dollar, commodities and equities won't be known today and then over the rest of the week.

So the 28 point rise in the Share Price Index futures contract early Saturday might not be a good indicator for the opening here this morning.

That came off the back of relief that the July jobs report in the US wasn't as bad as feared.

According to the American Department of Labor, non-farm payrolls data showed a rise of 117,000 jobs in July compared with a forecast for an increase of 85,000, while the country's unemployment rate dipped to 9.1% last month from 9.2%.

And if it hadn't been for the loss of thousands of government jobs, especially in the state of Minnesota in a temporary shutdown, the gain could have been hover 150,000, with a sharper rise in the market.

Globally the MSCI All-Country World Index shed 8.6% in value last week, the biggest weekly percentage fall since November 2008.

The S&P 500 index alone lost more than $US840 billion from its market capitalisation, while European equities measured by the MSCI Europe lost more than $US820 billion.

More than $US460 billion was lost in Asia's major markets including Australia, Tokyo, Hong Kong and Singapore.

Wall Street finished with a small rise on Friday night for the Dow alone after the July jobs report wasn't as bad as many had feared.

The Dow rose 60.93 points, or 0.54%, to 11,444.61. The Standard & Poor's 500 Index dropped 0.69 of a point to 1,199.38.

The Nasdaq Composite Index lost 23.98 points, or 0.9% at 2,532.41.

By the end of the week the S&P 500 had fallen 7.2%, its largest weekly percentage drop since November 2008.

It is 12% down and correcting from its April 29 high.

And for the week, the Dow fell 5.8% and Nasdaq was off 8.1%.

The Reuters-Jefferies CRB index a leading global benchmark, fell to a seven-month low on Friday as raw materials markets experienced one of their biggest sell-offs since the financial crisis.

US bond prices fell Friday and the yield on 10 year bonds jumped to 2.56% for another big daily rise.

In Europe, the other major focus for markets, shares were weak as Italy, France and Spain remained the areas of concern.

The Stoxx 600 Europe Index plunged 9.9% last week to 238.88, a 13 month low.

The index is now down 18% from the year's high in mid-February.

European markets are now in a correction phase (a fall of 10% or more from the most recent peak).

Bloomberg said indexes fell in all 18 western European markets: France's CAC 40 Index lost 11%, London's FTSE 100 Index dropped 9.8%, while Germany's DAX Index plunged 13%.

Italian Prime Minister Silvio Berlusconi said his country will introduce a constitutional principle of a balanced budget in an effort to reduce debt levels.

Helping the market erase hefty losses in afternoon trade, market reports said the European Central Bank was ready to buy Italian and Spanish bonds if Berlusconi commits to bringing forward specific reforms.

Italy's equity market alone is off nearly 30% since February.