Sharemarket, interest rates, currencies and commodities
The US profit reporting season is drawing to a close – well, at least the majority of blue chip companies have reported results. Now investors will shift their focus back to Australia. A spattering of companies will release earnings in the coming week but the peak release dates occur in the week starting August 20, especially around August 22 and 23. In the week ahead, Navitas is due to report on Thursday with Resmed on Friday.
It’s fair to say that investors are bracing for a fairly ordinary earnings season in light of the litany of earnings downgrades that have been issued. Mining and energy companies are battling rising cost pressures and softer prices. Retailers are coping with changing consumer preferences. Financial firms are battling conservative borrowing and investment practices of businesses and consumers. And media companies are in the painful process of reinventing themselves in response to technological change and consumer preferences.
Still, we enter the earnings season with generally favourable valuations as shown by a price-earnings ratio of 12.43 and a dividend yield of 4.83% – a yield that has only been exceeded in one period (the GFC from September 2008 to June 2009) over the past 18 years.
CommSec hasn’t changed its view on the sharemarket outlook. Currently, we expect the ASX 200 & All Ordinaries indexes to end 2012 around 4,400 points with 4,650 points expected by June 2013.
The chances of an interest rate cut have receded over the past week. Currently, the chance of a rate cut is put at 44%, down from recent highs near 50%. The overnight indexed swap market doesn’t have a rate cut fully priced in until early 2013, but certainly two rate cuts remain priced in over the next year.
The relationship between commodity prices and the Aussie dollar remains strong. Over 2012 the correlation ratio between the USD/AUD rate and CRB futures index is 0.75, where a figure of 1.0 is a perfect relationship. If the Aussie was too strong in relation to commodity prices, the chances of a rate cut would be a touch higher.
Craig James is the chief economist at CommSec.
