Stocks Jump As Lending Rates Settle Down

The Age

Tuesday November 4, 2008

VANESSA O'SHAUGHNESSY, INVESTMENT REPORTER

AN EASING in credit markets and expectations of further interest rate cuts in key economies have boosted investor sentiment.

The S&P/ASX 200 Index waltzed 5.1% higher yesterday, accelerating towards the close to finish up 203.5 points at 4221.5, despite the release of negative economic data.

Retail sales dropped the most in three years, there were fewer job advertisements and house prices have fallen.

But most of Australia's top 200 stocks gained, led by BHP Billiton, Wesfarmers, Woolworths and the major banks.

The dollar also benefited, surging above US68 from last week's low near US60.

Japanese markets were closed, but the Hang Seng added almost 4% and the US futures markets suggested Wall Street stocks would also rise.

"There are concrete signs that the bold action by government and central banks is paying dividends," said nabCapital head of currency strategy John Kyriakopoulos.

ICAP senior economist Adam Carr said once-frozen credit markets appeared to be thawing, as evidenced by the "material improvement" in short-term US dollar lending rates.

The interest rate at which banks lend to each other in the London interbank market, or US-dollar Libor, has fallen from an October 10 peak of 4.819% to 3.026% (see graph on BusinessDay 2).

On October 8, the US Federal Reserve cut interest rates by 50 basis points, as part of a co-ordinated action with other central banks. It has reduced the Fed funds rate by a further 50 basis points since, taking the US benchmark interest rate to 1%.

But Mr Carr said the drop in US-dollar Libor - and Australia's equivalent - made it possible Australian banks would pass on any rate cut the Reserve Bank announced today.

The market expects the RBA to follow last month's interest cut of 1 percentage point with a 50-point cut, taking the official cash rate to 5.5%.

"There's still scope for banks to reduce rates over and above what the RBA does," Mr Carr said. "But they may be reluctant to pass it on because ... things can change rapidly."

Besides the US and Australia, central banks in China, India, Hong Kong, Taiwan, South Korea and Japan have recently cut interest rates.

And investors expect the European Central Bank and the Bank of England to lower rates by 50 basis points this week.

The need for such action demonstrates that the threat of a protracted global recession has not diminished.

But the prospect of further decisive action has helped to boost the market capitalisation of battered Australian stocks.

Rare earths miner Lynas Corp jumped 13, or 40.6%, to 45, nickel miner Mincor Resources added 22.5, or 32.4%, to 92 and platinum miner Platinum Australia closed 18, or 30.5%, higher at 77.

In a report, CommSec chief equities economist Craig James said Australian shares were at their cheapest in 28 years, based on a forward price-earnings evaluation - a ratio based on the price of a company's shares and future projected earnings.

The average P/E of companies included in the All Ordinaries has fallen to 8.55, the lowest since April 1980.

But Tolhurst economist and strategist Tony Farnham said the projected earnings growth might not eventuate if the Australian and global economies experienced a recession.

A survey by Dun & Bradstreet has found Australian executives expect the economic turbulence to stretch into 2009, hurting sales and profits.

One in four executives said they had been affected by changing credit market conditions and two-thirds said they had been affected by the sudden plunge of the Australian dollar.

"The credit crisis has made it more difficult for Australian businesses to access funds - it has also caused significant volatility in the Australian dollar," said D&B director of corporate affairs Damian Karmelich.

© 2008 The Age

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