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Aug 08

So much for the downgrade…it’s all about growth expectations

So the US has just had its first trading day since S&P downgraded US debt to AA. A downgrade in anyone’s debt would normally result in an increase in yields as the debt is viewed as riskier so investors expect a higher yield to be compensated for that risk. What happened in the US overnight is the complete opposite…yields across all US Treasury debt issues actually decreased. The yield on US 10 year bonds dropped by 22bps which is equivalent of an increase in price of approximately 2%.

Whilst bonds increased in price, the opposite occurred in a massive way for the sharemarket. The S&P500 plummeted by around 5% and its wasn’t due to the downgrade…it is because the market is saying that fiscal tightening when times are tough results in weaker economic growth, a double dip recession is back in play (plus I guess there may be some panic thrown in) and that Europe is in deep doodoo…the ECB have started buying Spanish and Italian bonds and whilst they probably have to, its an obvious signal that these enormous sovereigns are in too much trouble.

Meanwhile, in Australia, the bond market is through the roof and equities are falling through the floor. Inflation is clearly off the agenda now and rate cuts are on the way (why don’t people listen to me!!!..cleary I’m a ittle insecure but that’s my issue). Thankfully my mortgage attained at the start of the year (the property purchase was not my idea) is variable and I’ll be looking to fix some lower rates over the coming weeks/months, but I digress. The Australian economy has been two speed and with the prospect of even China’s economic growth slowing, (thanks to a potential US double dip) and if 2008 is anything to go by, Resource companies will be laying people off and we could very well be back to one speed if global recession reoccurs…and unfortunately that one speed will be attained by pedalling in the small chainring.

So the outlook at this point in time appears to be one of uncertainty. Uncertainty for the economy, uncertainty for sharemarkets and uncertainty for bond markets. The only certainty I see at this point in time is market volatility and some more bond buying programs from the Fed (QEIII) and ECB. Oh yeah, the RBA will drop and if contagion continues, the Gillard government will be eager to spend some more(we do not have a debt problem by any stretch of the imagination) and give the voters some jobs.

BTW, the Australian sharemarket at around 3800-3900 (which I expect it t be today) is looking decent if you can stand the volatility and are prepared to hang on for the long run (I haven’t said that for quite a while and it feels a little strange), but beware a falling resources sector as many of these companies (the smaller ones that is) don’t really have much of a business without commodity price support.

Bottom line for me…I’m so happy to be Australian!

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1 comment

  1. BB

    Amen to that. The ASX in the mid 3,000’s will be the first time I have been excited about markets in a long time. Lets hope the advisers out there were able to shield themselves and their clients from the market & industry propaganda over the last 18 months.

    I’m pretty confident that my aggressive clients will be presented with excellent long term opportunities in the very near term and only because they all hold conservative portfolios with plenty of liquidity.

    Side Note: Interested in leverage? One of the few appropriate market environments to do so may well be on the horizon!

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