Global dramas converge on Australia's market

Local investors are suffering extreme whiplash as they find themselves caught in the crossfire of global crises as well as our own policy, currency and economic contentions.

Suddenly many people are asking: 'Why is the Australian stock market gyrating so wildly?' We have seen four near 'two per cent days' over a week as the stock market gained strongly twice only to lose those gains in the sessions that followed (The window dressing that tricked the market, July 2).

These moves are much larger than most world bourses. I believe they are caused because Australia finds itself at the crossroads of the world’s crises and growth situations and at the same time we have our own set of risks covering the currency, the economy and politics. In addition our regulators don’t help.

So let’s try and isolate at least some of the forces causing the gyrations.

The first force is our currency. If the world can smell a crisis there is a rush of money to the “safety” of the US dollar and the American currency rises and the Australian dollar falls. A fall in the Australian dollar may have benefits to many industries including resources but it scares overseas investors in Australian shares. The Australian dollar has fallen about 15 per cent in three months, which makes overseas investors very jittery on every dip.

But there are many other forces. Because we are so dependent on the resource industry for our taxation revenue and economic wellbeing we have become a quasi-state of China. And right now China is changing its growth pattern from export/investment to consumers, which reduces growth in demand for Australian resource products. There are also deep problems in the Chinese economy, which the Chinese government may manage over time but Australian stock markets are hit every time adverse China data emerges.

Then we go to the Middle East revolutions where the outcome is impossible to predict. That’s currently causing oil and gold to rise. That will help our share market today but of course domestically higher oil prices and a lower dollar will play havoc with petrol and energy prices.

In recent weeks Europe has been quiet but last night we saw Portugal was once again teetering on the brink. During the next year we can expect regular European crises because all the solutions are temporary (Young and restless: Europe's lost generation, July 4).

For the moment other global situations are over shadowing Europe but Australian banks are large borrowers on global money markets and while most of the borrowing is longer-term we are affected.

Finally the world is looking at the US to improve and help the globe out of its problems. Any US growth setbacks affect all markets, including Australia. However part of the US growth story is a big rise in low-cost gas and oil which affects the markets for our gas and coal. We are high-cost producers.

Domestically, unlike the US and Europe, Australia still has scope to cut interest rates but, as most developed countries have found, after a certain point lower interest rates do not help the economy much because the older segment of the population (a big part of developed world communities) respond by cutting back their spending because they are afraid of the adequacy of their retirement nest egg.

But lower rates fan investment in the high yielding non-mining parts of the Austrian share market, particularly banks.

And despite Kevin Rudd becoming prime minister the market thinks that Tony Abbott will win the next election and that will boost confidence. That helps Australian shares.

But the impact of the mothballing of large number of Australian resource projects has been a huge blow and our growth generating industry is now cutting back. This is part of the reason why the Reserve Bank keeps cutting rates – it wants to cushion the mining blow via a lower dollar.

And multiplying the gyrations caused by all these situations is the fact that the Australian market regulators still allow traders to have “pipes” into our stock market so traders can distort prices and have an advantage over genuine investors. The traders with an inside advantage multiply the forces pushing our market up or down on any one day because when they see big orders to buy or sell they jump in ahead of genuine investors.

 But that’s another subject.