Sweet And Sour Facts Turn Share Sentiment

The Age

Friday July 4, 2008

Scott Murdoch

THE pronounced economic slowdown and fresh fears the Asian growth story could falter and ease demand for Australian resources have amplified sour sentiment towards domestic shares.

For the first time in two years, the economy recorded a trade surplus in April but the return to positive territory could not be maintained in May.

The trade balance was revised up for April to a $12million surplus, following big iron ore and coal contracts being finalised.

But the positive number was demolished in May as imports rose by 6%, overshadowing a 1% increase in exports.

May's trade deficit was $965million, worse than economists' expectations. But Rio Tinto's move this week to lock in an 85% increase in iron ore contracts with the bulk of its Asian customers should improve the trade balance for June and July.

ANZ economist Riki Polygenis said a trade surplus would not concern the Reserve Bank, even though the bank has warned of the risks of the economy receiving a fresh shot of national income.

"We can expect further trade surpluses in coming months," she said. "The full increase in coal prices is yet to feed through and a recovery in rural production and higher global agricultural prices will support exports."

Prime Minister Kevin Rudd said it was vital for the economy to boost its fundamentals - in light of the predicted world growth downturn - by increasing export volumes. "The challenge for us long-term is dependent on movements in volume and not just price," Mr Rudd said.

The short-term trade improvement could not propel momentum on the sharemarket, which plunged below the 5000-barrier to trade at its lowest in two years. The sell-off means the S&P/ASX 200 Index is trading at least 1600 points off its November peak.

The US market on Wednesday night reached official bear market territory, with the Dow Jones Industrial Average now 20% off its high.

In Australia, the "hot money" from institutional investors was switched between the big resources companies - Rio Tinto was sold down by 8% - and piled into the banks.

Lehman Brothers chief economist Stephen Roberts said "rotational investment" was common in deep bear markets, where investors were chasing short-term yield instead of stock fundamentals.

Mr Roberts said Australia's weak economic outlook was occurring at a time when the immediate economic growth pattern of Asia was under question.

"I think we are beginning to see some concerns about the Asian economic growth outlook," he said. "I don't think there's too much concern about the long-term. It's more about the next 12 to 18 months that there's a risk of a pull-back and that could interrupt the stronger-for-longer argument which has been providing so much support for the Australian economy."

The evidence of economic slowdown has steadily built, with consumer sentiment and domestic consumption buffeted by the RBA's interest rate rises in February and March.

Stephen Koukoulas, chief strategist of TD Securities in London, has forecast that an interest rate cut could be a feature of the RBA's agenda in the next few months, after a measure of activity in the services sector pointed towards pre-recessionary levels.

"In terms of the falls in share prices, the falls are now looking quite parlous," Mr Koukoulas said.

"The performance of shares seems to suggest that the RBA is a little more inclined to cut while share prices are falling.

"The erosion of wealth is getting larger and adding to the case for monetary policy returning to a more neutral or a more accommodative setting."

© 2008 The Age

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