Market summary, 25 November 2011

Friday 25 November was the sixth day in a row the Australian share market fell, taking the S&P/ASX200 to under 4000.

What’s going on?

The Australian sharemarket fell steadily last week on news that the European debt situation has not been resolved and is unlikely to be an easy fix. Today, Monday 28 November, the market has recovered some of those losses – opening 1.5% higher.

It’s clear that what’s happening outside of Australia continues to be one of the biggest influences on the direction of our local market.

Global imbalances haven't been successfully addressed and resolved. This means we continue to experience market volatility, social turmoil and geopolitical tensions – all of which are unnerving policy makers and driving heightened watchfulness and caution from investors.

The fear of contagion of the European debt crisis has spooked investors. The Greek debt problem has now spread to Italy, Portuguese debt was downgraded late last week and the Germans are not ready to agree to joint euro-debt borrowing.

Currency falls

The Australian dollar has fallen also. This is a sign that global investors are moving into more conservative investments. It is currently hovering around US97c – last month it was around US$1.07.

The euro also fell to a new six-week low against the US dollar after French, German and Italian leaders agreed not to widen the role of the European Central Bank to support weaker euro-zone states.

In the US, budgetary announcements have given certainty to the market that although there are constraints they are visible and clear. However, the US sharemarket has also recorded a run of falls.

What this means for investors

In his morning market podcast today, BT Chief Economist Chris Caton suggested: “The only thing that matters for this week is what’s happening in Europe and the evolving flow of news from there.

Our futures index is slightly positive and the Australian dollar is trading around US97c. The other figures that are due this week - retail sales – are likely to reveal that our economy is doing OK, not great, but OK.”

In response to last week’s falls, Advance’s Manager Strategy and Research, Felix Stephen, said: “We’re confident global authorities will eventually find appropriate solutions to resolve some of the pressing issues confronting Europe, including sovereign default risks, liquidity risks and the need to re-capitalise fragile financial institutions in Europe.”

However, there are some short-term considerations that will influence this growth. The modest decline in economic activity that accompanies a typical mid-cycle economic pause has been significantly exaggerated this year by a series of natural and man-made disasters that destabilised the world. Global economic growth is only likely to recover slowly and gradually over the next year.

The current levels of the bond and equity markets have led investors to believe that we are back in the midst of the GFC. This is not the case. What we have seen is a correction in a bull market in equities.