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Mad week on the market

Investors are retreating into that old stalwart, gold.

Values have been bouncing up and down following days of dramatic news.

WHAT a week on the sharemarket. It plunged on Monday and Tuesday as investors digested the newly detailed carbon tax on our biggest polluters. A potential midweek recovery was stymied by ongoing fears about sovereign, including US, debt. And to top all that off, David Jones gave us the clearest indication yet that Australian retailers are struggling.

So let's have a look at these key market influences - and what they mean for investors.

At the last minute 500 companies were excluded from the carbon tax - mainly by the decision to leave out petrol - but that means our 500 biggest emitters, largely "dirty" electricity suppliers and coal producers, remain. Bottom line: overseas customers will require the same amount of coal - whether an Australia with a carbon tax will still provide it is the issue. Predictably, it was the energy and mining sectors that bore the brunt of sharemarket falls.

On the European debt front, austerity measures to keep Italy solvent last week passed parliament. The IMF predicts its government debt as a percentage of GDP this year will rise to 120 per cent, as opposed to 152 per cent in Greece. But as the world's eighth-largest economy, a default would have greater impact.

In the US, the debt ratio stands at close to 100 per cent, and a roadblock in fierce negotiations to increase that caused Moody's to place the US on watch to lose its AAA credit rating. If talks failed, the US could default, if only for a short time, which would significantly destabilise world markets (see Tech Talk, page 3).

Incidentally, the corresponding debt figure in Australia is only 24 per cent - and we're promised that will fall.

All this weighed heavily on our market, particularly financials. It is worth mentioning China at this point where the news was actually positive. Economic growth of a lower 9.5 per cent raised hopes government efforts to cool the economy and curb inflation may be working, which caused a market up tick that was not to last.

The avalanche of global data was supplemented locally by the warning from David Jones of a 15 per cent to 20 per cent drop in second-half profit on the back of an unprecedented deterioration of trading conditions. Forecast to continue into next year, that sent the shares down 15 per cent to a two-year low - and took the entire retail sector with it.

Myer reaffirmed its profit guidance with net earnings after tax expected to be 5 per cent below last year but had its shares drop 6 per cent. JB Hi-Fi and Harvey Norman were also down around 4 per cent. And media stocks, which rely heavily on retailers for advertising revenue, were hit, too.

Of course, in the background was the incredible step taken by News Corporation to close The News of the World in response to the spiralling phone-tapping controversy, which saw the shares hammered.

Where to from here? Well, the Australian sharemarket has now officially corrected - or fallen 10 per cent since its April peak. So on current earnings expectations, it is cheap. The question is whether it is cheap enough to withstand cuts to those expectations.

For now, investors are retreating to that old stalwart in times of risk aversion: gold. It hit fresh highs of close to $1600 last week, buoying up the whole sector. While big hitter Newcrest saw a corresponding rise of more than 3 per cent, some smaller players lifted even more.

But this was nothing compared with the 25 per cent geothermal energy producer Geodynamics put on the day after the carbon price was announced. Which just goes to show that regardless of the conditions, there are always opportunities.

Follow this writer on Twitter @NicolePedMcK

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