Holiday Gives Market A Breather

The Age

Monday January 28, 2008

Jesse Hogan with AAP and Bloomberg

BROKERS reeling from a long, turbulent week of sharemarket trading will be given some respite today courtesy of the Australia Day long weekend, but should be braced for more disappointment tomorrow.

The most influential US share index, the Dow Jones Industrial Average, slipped 1.4% on Friday, triggering a 75 point fall in Australia's sharemarket value in futures trading.

"Essentially if we were open on Monday we'd be down," BT Financial Group chief economist Chris Caton said.

"Now we've at least got a chance because the US may rise on Monday, and we'll know about that on Tuesday morning."

There is scant official influential economic information to be released in Australia this week, prompting broker CommSec to explain to its clients that "you could hardly call the coming week's domestic economic calendar 'densely packed' ".

Instead, most market watchers will wait for Thursday night for the Federal Open Market Committee's latest decision on US interest rates.

The dramatic sharemarket turmoil last week was followed by an emergency 75 basis point cut in US interest rates last week to 3.5%, with the committee citing "weakening of the economic outlook and increasing downside risks to growth" as the catalyst.

The Dow has slumped 8% from the start of the year, while the broader S&P 500 is down 9.4% for the same period.

Dr Caton said a further interest rate cut was inevitable, because for the past decade whenever the committee had made unscheduled interest rate movements it had followed that up with "a cut at least as big at the next meeting".

"The reason not to expect a usual model - the 75 (basis point cut) and then another 75 - is because they cut so close to the meeting," he said.

"There is an argument that monetary policy should proceed in gradual steps, so even if you think you know that the right interest rate cut is at least a full 1% from where it is now there's some rationale in doing it in two steps rather than in one."

The likely outcome is a 25 basis-point cut to 3.25%, according to futures trading and the average economist forecast in a Bloomberg survey.

Another announcement for this week will be the US' latest unemployment figures, although the timing of the release, Saturday night in Australia, will mean the market reaction will not be known until the following week.

So far in 2008, Australia's two main indices, the S&P/ASX 200 and the All Ordinaries, have slumped 7.6% and 8.3%.

Some brokers remain concerned the market is now set for a "bear" phase after years of increasing returns, but CommSec chief economist Craig James is among those who believe the rout could be shortlived.

He expects the two indices to "claw their way back to around 6000 points by mid-year and to 6700 points by the end of 2008". -- With AAP and BLOOMBERG