19 Dec 2014
Markets
- Global markets were hurt earlier in the week by the continued slide in the oil price even though lower oil prices are very good for economic growth (absent Russia, Venezuela, Iran and a few other countries).
- Emerging and Asian markets were hit hardest, also not assisted by a strengthening US economy and slowing China. Capital flight out of Asian and Emerging markets is increasing.
- European stocks were also down on Greece election concerns and Russia’s desperate actions.
- The US Federal Reserve then decided enough was enough and indicated they were more than happy with current interest rate settings given available data. Markets spiked globally as a result.
- In stock news, Leighton Holdings has announced the sale of John Holland to China Communications Construction Company for $1.15bn. Leighton will use the proceeds to reduce gearing levels by 10%. The sale will remove a subsidiary which competed against its other subsidiaries for work, with only one and a half years of forward revenue.
- The NBN agreement between the government and Telstra is now a done deal. Good news for shareholders as Telstra will receive $11bn and pick up additional work building the infrastructure. 10% of Telstra revenue per annum will now be government guaranteed for the next 10 to 20 years.
- The board of The Coca-Cola Company (US) has approved its US$500m investment in Australia’s Coca-Cola Amatil to help it expand its Indonesian business. The US company will take a 29.4% stake in Amatil’s Indonesian subsidiary, which will help accelerate the expansion of production, warehousing and infrastructure. The funds are much needed.
- Oil prices hit their lowest levels since May 2009 as oil demand forecasts for 2015 were revised lower by the International Energy Agency. OPEC has resisted calls for another emergency meeting - they’re happy to hurt the Russians and the US shale industry, whilst the Saudis want OPEC members to share any production cut pain equally (usually only borne by the Saudis).
- The Australian dollar fell further this week hitting a low of 81 cents against the US dollar. The move lower is mainly a result of the US dollar rising, though there are some concerns from foreign investors regarding the strength of the underlying economy.
Economics
- Reserve Bank Governor Glenn Stevens said he wants the Australian dollar to fall in order to be closer to 75 cents against the US dollar. He denied that further rate cuts were needed given jobs and inflation are largely at expected levels. The further fall in the currency will relieve pressure on the RBA to cut rates further if data worsens next year.
- The US producer price index, a key indicator of inflation pressures, dropped more than expected in November. Another sign that inflation pressures in the US remain subdued, assisted by lower oil prices, giving the US reserve bank more room to leave rates lower. US Fed may now be on hold until the second half of 2015.
- US consumer sentiment rose strongly in December hitting a near eight year high. Retail sales also posted their biggest jump in eight months. A very good sign leading into the Christmas holiday period.
- In order to defend their falling currency, the Russians raised the central bank cash rate from 10.5% to 17% overnight (five days after the last rate rise), in a drastic and desperate move which had little effect on the currency. The fall in the oil price continues to cripple the Russian economy, along with the effects of sanctions put in place by the US and Europe following the Ukraine conflict. Putin may be in trouble.
Politics
- The Federal Government’s budget deficit will hit $40.4bn this year, $10bn higher than expected six months ago, after huge falls in commodity prices have led to the biggest drop in the terms of trade since records began in 1959.
- Treasurer Joe Hockey has hosed down expectations the government will attempt to increase the GST next term. He correctly stated that an increase in the GST requires compensation (significant tax cuts) to low and middle income Australians, which the government doesn’t have the financial capacity for right now.
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