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US markets have seen yet another week of indecision and volatility as traders tried to weigh up falling oil prices and steady interest rates against further weakness in the financial sector and wider economy.
Over the past 3 weeks the price of oil has slumped around 19% lower as investors switch from a supply to a demand focus. With slowing growth in the developed world and rising inventories, investors started to think that despite a lot of uncertainty on the supply side of things, the recent highs were not justified by the level of demand. On Wednesday, the price of oil actually touched a 3 month low, ending below the US$120 / barrel. And that’s great news for the economy in terms of reducing inflationary pressure, and also reducing the impact to consumer and business spending power.
During the week, the Federal Reserve decided to leave rates steady as expected however there were signs of cautious optimism in the announcement that accompanied the decision – and that also helped buoy sentiment.
However, towards the end of the week, traders were reminded that the credit crisis was far from over with American International Group revealing a $5 billion quarterly loss, and Freddie Mac delivering a result that was 3 times worse than had been expected. Things looked better in the technology sector however, as Cisco managed to beat expectations with its results, and said that it expected the current economic weakness to be relatively short lived.
On the economic front, the Labor Department revealed that new jobless claims soared to their highest level in more than 6 years, and with big layoffs being announced from Star Bucks and General Motors, the fear is that the employment situation could further worsen.
In Australia, the start of the reporting season showed investors that while earnings were being impacted by the difficult trading conditions, underlying performance was for the most part holding up rather well.
Among those reporting, embattled Gaming company Tabcorp revealed a $164 million full year loss, but that didn’t stop shares rebounding, with investors instead focusing on the underlying numbers. Some large one-off writedowns did all the damage, but once stripped away, the normalized result came in about 14% above last year’s figures and the company also managed to maintain its dividend.
Westpac shares were in focus towards the end of the week, after the group issued a trading update which reassured investors that while they expected a slowdown in lending growth, earnings were nonetheless expected to rise by 8%, and the capital and funding position remained strong. While traders did take some profits in the banks towards the end of the week, they have for the most part done well in recent weeks, as the market comes to the realization while Australian financials will be impacted by a slowdown in economic growth and higher funding costs, they are in much better shape than their US peers.
Finally, the Reserve Bank of Australia also held rates steady during the week but there was a marked change in tone. It appears that recent signs of economic cooling have forced the central bank to adopt a more dovish stance, and that’s prompted most economists to forecast that there will be a rate cut within the next few months.
Over the coming weeks, there will be plenty of Australian companies reporting their results, and investors will be watching closely to see just how well things are holding up.
Make the markets work for you
Andrew Page
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