America was closed, Europe and Asia sagged, oil retreated a little, and other commodity prices were leaderless: American holidays continue to emphasise the primacy of US markets in setting global price levels in a wide range of products.
European markets fell 2.7% (some individual markets were off more, some less); US markets were off around 1.2% or a bit more (but closed on Friday), Asia was down more than 3% and Australia was off 3%-plus as well, despite Friday’s rise. Our market will be flat to slightly weaker today judging by the futures market Friday night.
Friday’s rise here was a bit of a ‘con job’ by punters looking to exploit higher commodity prices, and not worrying that the US markets were closed or the European markets were unsettled.
There was this belief that the poor US jobs figures were ‘good news’ because the 62,000 jobs lost meant US interest rates were not rising any time soon. Jobs losses in the US are going to worsen in coming months.
US investors and some local optimists still don’t understand that 2008 earnings in the US, Europe and here are going to worsen, before they get better and that forecasts for a big rebound in 2009 are off the planet. Some forecasts have US earnings rising 20% in 2009.
The AMP’s chief strategist, Dr Shane Oliver said in a note on Friday that “It’s anyone’s guess as to where it will go in the short term. If the oil price continues to surge then shares will remain under pressure, if it falls back then shares will have a great rebound.
"The high and still surging oil price along with slowing growth virtually everywhere, inflation worries and high bond yields are all short term headwinds for shares. Furthermore, the period out to September/October is often rough for shares.
"As such, it remains a time for investor caution and this is likely to be the case for the next three or four months.
"Although the next few months are likely to remain rough with further falls possible, we still see shares rallying sharply in the December quarter as the oil price falls back to a level more in line with supply and demand fundamentals, the economic outlook starts to improve and investors start to take advantage of attractive share valuations. The last quarter of the year is normally strong.
"Australian shares are now trading on their lowest forward PE since 1996 and their highest dividend yields since 1991, when bond yields were above 10%. See the above chart.
"While industrial companies are likely to see profit downgrades, current share prices are implying a greater than 20% slump in overall profits and this seems very unlikely. Prices from their highs last year they are currently trading on an 8.8% distribution yield, which is their highest since June 1996.
"Even if average distributions are cut by 10%, this still makes for a very attractive yield.
"After the sharp rise in yields in the last few months, made worse by recent inflation fears, bonds should provide better returns over the next six months as yields decline if as we expect global growth keeps slowing and inflation fears abate.
"While the ride for the $A will remain volatile, Australia’s strong terms of trade and high relative interest rates are supportive of further gains.
"We remain of the view that it is only a matter of time before parity is reached. The elimination of the monthly trade deficit on higher iron ore and coal prices will also likely be a positive for the $A."
But Goldman Sachs JBWere said in a commentary during the week:
"During FY08 the Energy and Resources outperformed significantly and the only sectors to post positive returns.
"The brunt of the selling was experienced in Consumer Discretionary, REIT’s, Industrials and Financials which experienced declines exceeding 25%, the majority of this occurring over the last 6 months.
"To date the share price declines have been driven largely by PE deratings in anticipation of increasing earnings risk with relatively little by way of negative earnings revisions coming through outside of those companies with excessive leverage.
"The economic data flow during June provided further evidence that the domestic economy is slowing, with retail sales, building approvals and credit growth all continuing to soften.
"Employment growth turned negative, recording the first fall in 18 months while the RBA kept rates on hold after confirming inflation is high and demand will need to slow.
"The AUD remained strong ending the month at 96.6¢ (+1¢).
"The key issue for investors remains the trade-off between risks to corporate earnings in light of a rapidly deteriorating domestic economic outlook and increasing inflation risks; versus increasingly attractive valuations for equities.
"We continue to favour defensive sectors over domestic leverage heading into the key August reporting period, particularly given the increasing uncertainty in the domestic earnings outlook over the next 6 months.
"The potential for the USD to find support as sentiment around credit availability improves, suggests stocks with offshore earnings could outperform during FY09."
In London the FTSE 100 index closed on Friday at its lowest level since November 2005 as it threatened to join indices in Asia, the US and Europe among the bears.
The UK index has fallen 19.6% from its peak in October, leaving it just short of the 20% fal
