Australia Market Report of July 17: Is The Worst Over?

Sydney, July 17, 2008 AEST (ABN Newswire) - Last night Wall Street led on easing concerns about a credit crisis, but gains are likely to be tempered by declines in mining and oil companies after oil, gold and base metals prices fell.

September share price futures pointed to a stronger opening, rising 1.3% to 4915.0. That was 44.4 points above the underlying benchmark S&P/ASX 200 index , which bounced off a 2-1/2 year low to close up 1.1% on Wednesday at 4870.6.

While bargain hunters snapped up banking shares, hurt by a loss of confidence in key US mortgage finance firms Freddie Mac and Fannie May, big miners weakened on lower commodity prices, with energy stocks hit by a sharp fall in the oil price.

Investor are being urged not to panic after the recent share market turmoil, but have been warned to expect more turbulent days in the weeks and months ahead. After Tuesday's slump took shares to their lowest level in 2 1/2 years - and bank shares hit levels not seen since 2001 - analysts conceded fear had overtaken the market and dragged it into full-blown "bear market" territory.

Many experts are increasingly frustrated at the way Australian companies, which are healthy and profitable, are being dragged down by the US problems, occurring thousands of miles away and no immediate danger to local companies' profits.

The Australian dollar closed weaker yesterday for the first time in a week - after reaching a 25-year high above $US0.9800 overnight - as the central bank chief hinted that interest rates may have peaked. The Australian dollar reached a 25-year high soon after midnight when it touched $US0.9849 on the back on broad US dollar weakness. It was the highest level since the unit touched $US0.9893 on January 17, 1983, during the days of a fixed exchange rate.

Key Economic Facts and Figures

Australia's dollar snapped a four-day gain after Stevens told economists that the chances of "keeping inflation low over the medium term are good," suggesting the RBA may have finished raising rates. The currency also declined as the yield premium on the nation's two-year debt compared with similar-maturity Treasuries narrowed 6 basis points to 4.17 percentage points.

The Australian economy is expected to record below trend growth for the rest of the year and into 2009, a survey shows.

The Westpac-Melbourne Insitute index's annualized growth rate, a forecast of economic growth in three to nine months, was 2.1% in May down from its long term trend of 3.9%. The annualised growth rate of the leading index has fallen from 6.5% six months ago. It is the sharpest six-month decline in the growth rate since February 2001, when the goods and services tax was introduced.

IPO and M&A News

Indonesian miner Bumi Resources is expected to announce it has taken a controlling stake in WA miner Herald Resources (ASX:HER) within days after former rival suitor Antam-Zhongjin sold its 19.35 per cent shareholding. More than 22 million Herald shares, representing about 11 per cent of the company, changed hands in a flurry of trades yesterday, two days out from Bumi's deadline for shareholders to accept its unconditional bid.

CLP Holdings (HKG:0002) is looking for interested buyers for its Australian unit TRUenergy, although the pricing risks associated with its Yallourn Energy power station in Victoria may keep potential bidders away. Last December Origin Energy (ASX:ORG) had discussed a backdoor merger with TRUenergy that valued the unit at as much as $5 billion. Since then there have been rumours that AGL Energy (ASX:AGK) was considering buying TRUenergy. A merger with TRUenergy would mean Victoria's big energy players will be reduced to two.

US activist hedge fund Harbinger Capital has signalled its intention to play a bigger role in developing Western Australia's Midwest (ASX:MIS) iron ore assets, securing approval to boost its stake in the Chinese-controlled Midwest Corp beyond 15 per cent and wasting no time doing so.

WESTPAC (ASX:WBC) has edged closer to a $14 billion takeover of St George Bank (ASX:SGB) after Commonwealth Bank of Australia (ASX:CBA) ruled out making a rival offer. CBA chief executive Ralph Norris, speaking after addressing a business lunch in Adelaide yesterday, he said "We have no intention of getting involved in that transaction." However, CBA, which now enjoys the sector's premium rating after Westpac's downgrading due to the St George bid, was the best positioned of the remaining big banks to make a counter-offer.

Important Corporate News

Australia's second-largest oil and gas producer, Woodside (ASX:WPL) Petroleum is due to release its second-quarter production report. Investors will be watching for any change in its 2008 production target of 80-86 million barrels of oil equivalent.

Rio Tinto (ASX:RIO), fighting off a hostile $US153 billion ($156.4 billion) offer from BHP Billiton, said second-quarter iron ore output rose 13% to a record on demand from China, the world's biggest producer of steel. Production of iron ore, the largest contributor to Rio's earnings, increased to 41.9 million metric tonnes from 37.1 million tonnes a year earlier, the company said. Alumina and mined copper output also reached a record.

Allco (ASX:AFG) announced last month that it and its co-investors had agreed to offload the Californian wind farm, considered one of its best overseas assets, to a US consortium for $US325 million ($A346 million). The sale has resulted in an anticipated after tax net share of sale proceeds for Allco of approximately $163 million, as well as releasing Allco from contingent commitments of $68 million, it said.