Comments from Ben Bernanke regarding concerns about the US economy on the growth side and inflation side have had a negative effect on the markets. In his testimony to the US Congress on Thursday, Bernanke expressed concerns about the upside risks from inflation but focused more on growth. He asserted that higher energy prices, tighter credit and weakness in the housing market would inhibit consumer spending.
Morgan Stanley has suffered a US$3.7B write down due to losses related to the sub-prime mortgage crisis. The company said that this may reduce its 4th quarter earnings by US$2.5B.
Earlier on in the week, Citigroup announced it will need to book an extra US$11B in losses due to the continuing sub-prime mortgage fallout.
General Motor announced a $39B loss in the 3rd quarter.
Australia has seen interest rates rise by 0.25% to 6.75% as expected. This is the first time that the Reserve Bank of Australia has lifted interest rates in an election month. Australians go to the polls to vote on 24th November. The move in interest rates is seen as detrimental to the current Liberal Party’s chances for retaining power. The rise in interest rates is seen as confirmation of the strength in the Australian economy, with a tight labour market, strong consumer spending and increasing costs. Inflation is at 3.1%.
Jobs data in Australia came in weaker than expected, with the unemployment rate increasing from 4.2% to 4.3%. This number is still at 33-year lows and shows the underlying strength of the Australian labour market.
New Zealand’s unemployment rate fell to a new record of 3.5%, increasing chances that the New Zealand central bank will keep interest rates unchanged well into 2008.
The ECB & BOE both left interest rates unchanged this week as expected. Trichet’s speech was greatly anticipated but ended up having minimal impact.
BHP Billiton has launched a bid for Rio Tinto which has been rejected. BHP offered three shares for every one of Rio Tinto’s. A combined company would have a market capitalization of around $350B. The news has seen Rio Tinto’s shares climb to record highs as the market anticipates another bid. The move by BHP Billiton is seen as a signal of confidence that the super commodities cycle will continue into the next decade as China and India fuel demand.
There was little good news coming out of US markets this week. Concerns about the US economy sent the US dollar tumbling to new lows against the Euro and 26 year lows against the pound. The downturn in equity markets led to a strengthening of the yen, an unwelcome development for Japanese exporters. There are concerns that a stronger yen will undercut exporters’ profits. The big corporate story is the potential takeover of Rio Tinto by BHP Billiton. The bid underscores the strength of the commodities sector, driven by China and more gradually by India. Financial stocks were once again sold off and commodities continued to rise, mainly on the back of the weak US dollar. The question now is, how far will the US currency fall? It is likely to stabilize once it looks like the US economy has bottomed. For now, there is no solid evidence that this has happened and the outlook for the US currency and economy remains bearish.
Head of Fundamental Analysis
HUBB Financial Group