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 MARKET REPORTS |
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Economics
Fed rate cut no heart-starter for US sharemarkets
December 12, 2007
Clifford Bennett, Chief Economist, Sonray Capital Markets
The soft underbelly of consensus expectations at the moment is the view that the most recent Fed rate cuts will completely cure the US economy of its sub-prime flu. It often takes longer to recover than is expected. A cautious moderate dosage of 25 points will be helpful, but not the last.
While the view here remains that the Fed should have cut by 50 points at the last FOMC, and again by 50 points at this meeting, as a necessary dramatic effort to soften the impact of the sub-prime and falling home prices dilemma, they have stuck to their current speed of 25 clicks. For the moment the sub-prime crisis and falling home prices are locked in a relentless downward spiral, which will continue to slow the US economy.
The occasional piece of good data, such as home purchase intentions, are the product of some purchasers seeking credit before the market further evaporates.
The Fed is not completely un-concerned about inflation. My own view is that inflation will moderate from current levels throughout 2008, but the Fed will want to maintain an image of balance in its deliberations. While recognising the on-going/worsening credit crisis, the Fed must cut again, but it will deem 25 points appropriate.
The equity market may be disappointed, having fully priced in a 25 point cut and some hopes of a 50 point reduction. Nevertheless while a 25 point cut may weigh on equity markets just a little in the short term, the overall outlook for equities remains positive. The two key points about consensus:
1. Markets seem to be over-estimating the potential for Fed rate cuts to solve the credit crisis, or the downside risk to the US economy. The forecast here remains a US economy flirting with zero growth in Q1 Q2 2008, even while the Fed cuts rates to 3.75% by mid-year.
2. Global markets seem to be under-estimating the potential for the global economy to remain firm of its own accord in spite of a possible, almost likely hard landing for the US economy. A US slow down to near zero growth in H1, worst case scenario, would see only 0.5% taken from global GDP in 2008, and more probably just 0.3%.
Currency markets are likely to continue to be dominated by a falling US dollar, as an expected 25 point cut would be viewed by markets as not enough, with more therefore likely to follow. This 25 point cut will leave most global investors maintaining the US economic outlook in the “too hard” category. Therefore a further decline in the US dollar is highly probable. The Euro should achieve 1.5700 in 2008, with further risk to 1.6200.
2008 Forecasts:
GDP: 4.0%
CPI: 3.2%
RBA: 7.25%
AUD: 1.0100
USD ASX200: 6,950
Key Forecasts:
- Fed will cut three times by 25 points in 2008.
- US economy will flirt with negative growth Q1, Q2.
- US equity markets remain at risk near term.
- China to remain a powerhouse.
- Global economy to remain firm.
- Commodities volatile but bullish.
- Gold target at US$495, US$800 achieved, US$1100 next.
- US dollar to continue accelerated collapse next 6 months.
- Carry trade is old news and over, USD/YEN to decline to 103, 97.
- RBA to raise rates to 7.25% in H1 2008.
- Australian dollar will continue to climb, 93 cent target achieved,
next parity $1.00, but in 2008, then 1.08 1.12 in following year.
- Global equity markets may suffer minor drag from US market
weakness occasionally, but remain strong.
- Australian equities increasingly aligned to global growth. 6,900 7,350 in 2008.
More articles from this edition of CompareShares:
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Stocks: Stocks for the long haul: hot European stocks
Resident Trader: How stops can cut a profit run
Trading: The ultimate guide to trading shares for beginners - final part
Stocks: Corporate America embracing renewable energy
Markets: Fed rate cut no heart-starter for US sharemarkets
Stocks: Stock to watch: Uranium Exploration Australia
Companies: Bell Financial shines on debut
Disclaimer: This recommendation has been issued on the basis that it is only for the information and exclusive use of the particular person to whom it is provided by Sonray Capital Markets Pty Ltd ABN 18 104 482 993, AFSL 231151. These recommendations are current as at the date of issue. Past performance is no guarantee or reliable indication of future results. Trading in derivatives may involve a high degree of risk and significant loss, and is appropriate only for persons who can assume risk of loss in excess of funds deposited. This recommendation is of the nature of general information only and must not in any way be construed or relied upon as legal, financial or professional advice. No consideration has been given or will be given to the individual investment objectives, financial situation or needs of any particular person. The decision to invest or trade and the method selected is a personal decision and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of any investment for your circumstances. Although the information in this recommendation has been obtained from sources considered and believed to be both reliable and accurate no responsibility is accepted for any opinion expressed or for any error or omission that may have occurred herein.
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions. |
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