Ahead: seven days sure to shake the financial world
By MALCOLM MAIDEN
This is a potentially huge week for investors as Australia, America, Germany and Japan all pass critical economic and political checkpoints.
Overnight, Germans were due at the polls in a cliffhanger election that will either see the status quo retained with the re-election of a conservative government led by Helmut Kohl and the Christian Democrats, or a change to a coalition led by the Social Democrats.
At about 3am on Wednesday, investors will learn whether US Federal Reserve chairman Alan Greenspan had the numbers inside his central bank to lower US interest rates. The markets are already counting on the cut happening.
Crucial economic data from Japan and America will be released late in the week, and Japan's ruling Liberal Democrat party will again attempt to produce a package to levitate its crippled financial sector out of the mire of bad debts now estimated to exceed around $US1 trillion ($1.72 trillion). On Thursday night, Germany's central bank will also consider (and probably dismiss) calls that it cut rates to spur world growth.
Then, next weekend, there are two more electoral races - the one we all know about between John Howard and Kim Beazley, and another, more important in world terms, between Henrique Cardoso and Luiz Inacio Lula da Silva in Brazil.
The flurry of activity offers some promise for battle-weary investors here and overseas, but also considerable risk.
Greenspan's heavy hint that a rate cut is coming has, for example, sparked a cautious rally in bond and sharemarkets here and overseas. That is because a rate cut would be an important sign of Greenspan's determination to inoculate America against the global economic pandemic.
But if the markets bounce too far if and when a cut is confirmed, they will be double-dipping. The Reserve has left the discount rate unchanged at 5.5 per cent since March last year, but every other market rate has been falling. It will take a cut of about three quarters of a per cent in the official rate to catch up with the market, more than it expects on Tuesday. A cut this week should satisfy the markets that the process has begun. But it shouldn't be a cause for delirium.
In Australia, sellers could emerge, depending on the political landscape. Although the race between Howard and Beazley is close, analysts say the markets are not pricing in a win by Labor, and its attendant ramifications, including more interventionist economic management, and no GST.
The prospect of One Nation gaining influence in the Upper House, or the Democrats blocking Coalition legislation including a GST that extends to food, is also not yet in the number-work, although the Democrats' candidate in the Australian Capital Territory, Rick Farley, could beat Liberal Senate President Margaret Reid, and immediately change the balance of power. Most senators elected at the poll will take their place next July, but Territory Senators move into the big burgundy room immediately.
There are plenty of other factors to ponder. Japan's latest Tankan survey of industry on Thursday will probably confirm that Japan's recession is deepening: jobs numbers and leading indicators from America at the end of the week should confirm that the US economy is slowing from a 3 per cent growth rate as the global crisis impacts, and may vindicate an interest rate easing; on Thursday night, Germany's Bundesbank meets to consider its interest rate settings.
It has so far shown no inclination to participate in the co-ordinated rate cuts proposed by US President Bill Clinton and, if it leaves rates untouched as expected, will tacitly confirm that the job of avoiding a global recession falls squarely on America's shoulders.
And one day after Australians vote, Brazilian president Henrique Cardoso puts his government to the test at a time when South America's most important economy is in danger of succumbing to the economic pandemic.
Capital is being evacuated from Brazil and other Latin American nations because their economies have similar structural weaknesses to those in Asia, and Cardoso last week said his government, if re-elected, would implement economic measures including tax increases to rein in Brazil's swollen budget deficit.
All in all, a busy week, and whether the markets are up or down at the end of it is anyone's guess - which is par for the course in recent weeks, and the reason why government paper is being rushed by investors. As investors react to uncertainty by seeking the safety of a quality government guarantee they are bidding up the price of bonds, and pushing down bond yields.
Australia's 10-year bond is at a 16 year-low at 5 and a bit per cent, US 10-year notes are back to 1967 levels at around 4.6 per cent, and the 30-year US bond yield has plunged from 5.6 per cent to 5.2 per cent in a month. It is a global phenomenon: UK bonds are at 25-year lows, German bonds are the lowest since 1908, and Japan's bond rate of three quarters of a per cent is the lowest ever.
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The flight to government paper puts the recent American perpetual preference share issues by National Australia and ANZ bank into a less-jaundiced perspective. When the banks and their adviser, Merrill Lynch, began looking at raising tier one capital before Wall Street plunged last month, NAB thought a $US1 billion ($1.72 billion) raising would be possible, and ANZ planned on harvesting $US500 million from the US broker's vast network of retail customers. In the end they each raised $US400 million.
That's a haircut, undoubtedly. But demand for overseas corporate paper in the US has plummeted because of concerns about a global economic crisis. In the past five weeks the ANZ and NAB have been the only foreign issuers in the US market. In a classic sign of a buyer retreat, the gap between buy-quotes and sell-quotes for existing paper has also yawned open, by between a quarter of a per cent and 1 per cent, depending on the credit rating of the issuer.
Just like a coal company or iron ore miner negotiating a sales contract in tough times, the local banks had to assess demand, and then find a balance between the price they were willing to pay for the new capital (8 per cent in both cases) and the volume that they could sell. In the end, volume took most of the adjustment, and both offers were oversubscribed.
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For share addicts, Australia looks about as good a place as anywhere to be if the aim is to avoid potentially wild swings. This market is rated the third most exposed to Asia after Japan and New Zealand, but because it began falling in response to Asia sooner, it has shown inner strengths undreamed of in recent weeks.
In the past month, Wall Street has risen or fallen by more than 3 per cent in a day on five occasions, and finished virtually unchanged. Tokyo's Nikkei index has posted six 3 per cent-plus daily moves in the same period, and is down overall by 4.8 per cent. Australia has racked up no 3 per cent-plus days, and is up by almost 2 per cent.
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