More signs of the return of the credit crunch as commodity prices, currencies and stockmarkets had less than confident finishes to a nervous week.
The Reserve Bank followed the lead of the US Federal Reserve and added far more cash on Friday than it had been doing for the previous couple of weeks.
The Fed kicked in a gross $US47.5 billion in cash into US money markets on Thursday, the second time in a week it had done that. A fortnight earlier it had added $US41 billion. On both occasions the amounts injected were the largest for six years.
The first injection on November 1 had been done to force rates down to the new Federal Funds rate of 4.50% set the day before.
The Reserve Bank of Australia injected more money into Australian money markets on Friday as 180 day bank bills continued to trade at a very high 7.30% but 90 day bills jumped to 7.18% on Friday from 7.12% the day before. That's now 0.43% above the cash rate of 6.75%.
The RBA injects cash, like the Fed, to keep the interbank cash rate at the official level.
The RBA added $1.71 billion in cash on Friday well above the estimated cash requirement for the day of $719 million.
That was more than three times the $475 injected by way of repurchase agreement on Thursday; The RBA purchased $100 million of residential mortgage bonds as well that day to take its total injection to $575 million.
As well the bank allowed the exchange settlement account to rise to around $3 billion at the end of trading to allow enough liquidity to the banks to get though the weekend.
It was the largest amount injected into the markets for several weeks by the RBA and came after a period of declining liquidity support and a return to normal in the interbank bank bill market, which is at the heart of the Australian financial system.
The Fed move came as sterling interest rates rose, and the margin of the London Interbank Offered Rate rose to a margin of 1.69% over the equivalent US short term treasury market rate on Thursday.
But in the longer-dated US Treasuries market, 10 year bonds closed around 4.16%, the lowest for more than two years a sign of the continuing concern investors have about the immediate outlook for shares, credit markets and commodities.
Oil, gold and other well traded commodities have seen prices fall in the past week as financial investors have retreated to the sideline and stocks of materials, such as copper, risen sharply.
The AMP's Chief Strategist, Dr Shane Oliver says the combination of ongoing worries about the impact of the sub-prime crisis, record oil prices and whether the Fed will cut interest rates quickly enough are all likely to weigh further on shares over the next few weeks.
"So the correction in shares may have further to run, possibly with another 5% downside. While this could possibly see US shares re-test their August low, Australian shares as measured by the ASX 200 index should find strong technical support around the 6200 level (i.e. the bottom of the range that prevailed between May and through most of July).
"However, the correction is likely to remain modest compared to the July/August falls and the broad trend in shares is likely to stay up.
"Sharemarkets are still not expensive, profit growth is likely to remain reasonable albeit slower than it has been and further falls in US interest rates are inevitable and this will provide a strong source of support for shares.
"While gold and oil are undergoing a correction and base metals are likely to remain soft in the near term, the broad trend in commodity prices is expected to remain up on the back of strong structural demand in developing countries such as China and a constrained supply response.
"The $A is vulnerable to further weakness in the short term on the back of uncertainty about the global growth outlook and commodity prices. However, the trend is likely to remain up.
"The combination of an ever-widening differential between Australian interest rates and those in the US, a weak $US and still strong commodity prices is likely to continue pushing the $A higher.
"Volatility is likely to remain a key feature of financial markets and notably shares over the next six to 12 months, with uncertainty about the outlook likely to remain high and earnings growth slowing down at time when more investors are exposed to shares."
