Markets UP?

By Glenn Dyer | More Articles by Glenn Dyer

A solid end to the week in the US means a solid opening here today,thanks to better than expected new home purchase figures in America.

But some analysts caution against too ready an acceptance and are forecasting a sharp drop in next month's report.

They point out there was a surprise rise earlier this year, and then a sharp drop in succeeding months as the industry tanked.

And they also point out that the subprime mortgage crisis is concentrated in the existing home market because there are more existing homes traded each year than new ones (existing homes, apartments, townhouses etc make up around 85% of all swelling sales and new starts the remainder).

And it's the existing homes where the impact of the interest rate adjustments now underway on subprime mortgages issued in 2005 and 2006, are being felt.

Two reports on Friday showed purchases of new homes increased 2.8% to an annual pace of 870,000 in July, and that durable goods orders rose 5.9% last month.

Both were a lot better than expected. In fact the rise in new home deals went against every forecast of another sharp decline.

But analysts also issue another caution: both figures were for July, just as the subprime crisis was spreading and hurting.

In August it hit with a crash over credit markets in the US and Europe (also Asia and Australia), as well as sharemarkets. It will be figures for stats like new and existing home sales, retail sales, durable goods orders, industrial production for August and September that will tell whether the US economy has been hurt by the credit crunch.

Based on these figures for July (and retail sales) there is no need for an interest rate cut when the Fed next meets on September 18; and its policy approach at its August 7 meeting of still concentrating on inflation, was appropriate.

That approach was abandonedwhen the Fed cut its discount rate and warned about the risks to the economy on the downside from the credit crunch.

That was ignored in Friday's relief bounce in the US as all markets rose.

US stocks jumped with the S&P 500 Index to its best weekly gain since March.

The S&P 500 finished 1.2% up on the day and 2.3% up on the week at 1,479.37; NASDAQ rose 1.4% for the day and 2.8% over the week at 2,576.69 and the Dow rose 1.1% on Friday and was up 2.3% for the week at 13,378.87.

London's FTSE 100 finished up 2.6% on the week, while the MSCI – Asian shares, excluding Japan – rose 2.43% on Friday and a massive 10.6% up on the week

In Australia the All Ords jumped 7% to 6087.2 last week but ended down 1% on Friday. The ASX 200 had a similar experience, ending at 6088.5.

While European stockmarkets had their biggest weekly gain since June, Asian shares were knocked lower by news that the Bank of China had almost $US9.7 billion invested in US subprime loans.

But while the rally in shares looked confident, yields on 10 year US Government bonds eased to 4.61% as investors still parked cash in the safest market in the world.

While the new house sales figures were encouraging, they were still 10% down on July 2006, while the backlog of supply eased to 7.5 months supply at July's sales rate.


Meanwhile the AMP's head of Strategy, Shane Oliver, believes while the worst for shares is 'most likely behind us' volatility will still be a concern.

He says credit markets will take a while to return to normal and there will probably be more investment funds announcing that they have run into trouble over the last few weeks and uncertainty will linger regarding the US economic outlook.

"Beyond the short term uncertainty, shares are likely to provide strong returns on a six to 12 month view, with the December quarter likely to see very strong gains. Share valuations are attractive, helped by low bond yields.

"The Australian and global economies are generally in good shape, with US weakness offset by strength elsewhere.

"Inflation and interest rates remain relatively low, with interest rates now on the way down in the US. And the corporate sector is solid, with low gearing and reasonable profit growth.

"The latest round of profit results suggests that profit growth will remain a strong positive driver for Australian shares over the next year as will ongoing buybacks and the continuing inflow of funds into the Future Fund and the Government's new education and health funds, much of which will find its way into the share market.

"Bond yields are likely to range trade, but the short term risk is on the downside due to worries about the US economy. A further recovery in the $A is likely once the uncertainty surrounding credit markets and the US economy settles down.

"Commodity prices are likely to remain high and the interest rate differential versus the US is likely to widen providing support for the $A.

"Last week's plunge in the share prices of Japanese exporters as the Yen rose and this week's rebound as the Yen fell is telling us that the latest bout of unwinding of the so-called carry trade – resulting in a rising Yen/falling $A – won't be sustained."

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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