Despite a late US Dow index rally, last night was among the more serious sharemarket falls we have experienced since the global financial crisis plunged markets in 2009. (The Australian share market opened sharply lower and was down 1.57% as Crikey went to press.)
We are well above the dismally low levels witnessed on equities markets during the crisis, but last night you could see fear in almost every corner of the world. The forces behind each of the fears are probably manageable, but when they occur together, as what happened last night, they triggered waves of selling, including a savaging of the Australian dollar.
And of course Gillard’s mining tax dithering is rekindling global doubts about the sovereign risk of this country which threatens to put Australia and our high house prices in the eye of the storm.
And for most Australians, the global wave of selling will be reflected in our share prices levels at June 30, which means the value of superannuation funds will be hit on balance day. Many retirees will have their income reduced for the year ahead.
Let’s look at some of the fears that are plaguing the markets. This sell-off started yesterday in China, and initially the analysts claimed that it was merely the institutions raising money for the $US20 billion Agricultural Bank of China initial public offering. It may have been partly that, but the fall in China’s sharemarkets also reflected the fact that China’s Conference Board corrected its growth index for China from a rise of 1.7% to just 0.3%.
China is slowing much more rapidly than expected, and as a result the bad property loans that are in its banking portfolios will weigh down future growth.
In the past China has always managed these issues and I think it will do it again, but the markets fear there will be much more pain than had been anticipated.
Meanwhile, in Europe the big banks have been playing a stupid game of borrowing from depositors and then investing in the sovereign debts of European countries that can’t pay.
Tomorrow the banks are supposed to repay €442 billion in emergency loans but they almost certainly will have to be bailed out again. Fears of bank collapses are rife. On top of this dire outlook, Europe’s austerity measures will bring on recessions in countries ranging from Greece to the UK which will make it even harder for the banks. And the strikes in Greece will be repeated in many countries, which could make the spending cuts impossible to deliver.
In the US they are helped because in a crisis money flows to the world currency, so the US dollar rises. Nevertheless, there are still chronic housing problems so consumer confidence is depressed and the US economy is still living on the old stimulus packages. Accordingly Wall Street’s earnings estimates look too optimistic.
And finally the falls in the markets are triggering selling from chart-based investors which multiplies the fear and concern.
Allaying all of these fears will require a lot of work on behalf of Europe, China and the US.
And of course when it comes to Australia, we must face the fact that our enormous level of overseas bank borrowing is going to be difficult to sustain at current interest rates. As I keep pointing out, Australian debt, including bank debt, is in a similar range to Italy and not far behind Spain when related to GDP.
If Gillard bungles the mining tax issue in this global environment then the blow to Australia’s sharemarket and the impact on the cost of Australian bank overseas borrowing will be severe. In turn, this will hit house prices.
Australia has always had a high foreign debt, it would be more helpful if it was reported in historical context of current debt relative to GDP.
Also you can spare us paras 3 and 14.
When is someone going to use “Sovereign Risk” correctly. The presence or absence of a mining tax will make no difference to Australia’s ability to repay any of its debts. The following definition makes it clear:
“sovereign risk; Definition
Probability that the government of a country (or an agency backed by the government) will refuse to comply with the terms of a loan agreement during economically difficult or politically volatile times. Although sovereign nations don’t “go broke,” they can assert their independence in any manner they choose, and cannot be sued without their assent. Sovereign risk was a significant factor during 1970s after the oil shock when Argentina and Mexico almost defaulted on their loans which had to be rescheduled.” (source Business Directory.com)
A resource erent tax may change the cost of doing business in Australia relative to another country but it clearly does not alter our Sovereign risk. Please use the term correctly in future Robert otherwise I fear you will appear a dupe of the mining sector.
Gottliebsen says “the fall in China’s sharemarkets also reflected the fact that China’s Conference Board corrected its growth index for China from a rise of 1.7% to just 0.3%.”
This is just wrong–the Conference Board is a US company; it is an index of leading indicators (and was for April, so who cares!); and it did not prompt the rout yesterday, that was just an easy factoid for the media to grasp hold of as the cause. More likely was end of quarter repositioning amid continued sovereign debt fears.
The Chinese govt’s own index of leading indicators for May shows growth easing to a more sustainable pace, partly reflecting the rising base of comparison a year ago.
He also says: “And of course when it comes to Australia, we must face the fact that our enormous level of overseas bank borrowing is going to be difficult to sustain at current interest rates. As I keep pointing out, Australian debt, including bank debt, is in a similar range to Italy and not far behind Spain when related to GDP.”
This is totally relating apples to oranges–conflating private and public sector debt etc. A rubbish argument.
So many factual errors make it difficult to find any credibility whatsoever in this “analysis”; given the two references to Gillard and the root of all evil (aka the RSPT) and house prices (none of which had anything to do with yesterday’s international price action) suggest it is just axe-grinding…
Dithering?
You said Gillard was dithering.
She’s been PM for hours. The RSPT is still Labor policy. The spending it was meant to pay for Even if she gets enough political support for a change, there will remain an RSPT-sized hole in latter year budget projections that needs to be filled or election-winning promises might be compromised.
I realise you’re only a journalist, and have never had to manage a really difficult real life problem that affects the futures of real people.
But … dithering?
Two terms have been totally redefined by the mining industry: “sovereign risk” as pointed out by jeremy@capeability.biz and “retrospective/retrospectivity”. Thanks to the mining industry these two words have completely new meanings. A PR coup of the highest standard.