An analysis of CMC Market’s most profitable clients measured by dollar value, found that one of the most popular CFD instrument traded over the last week was the CHINA50, a share index tracking the performance of some of the largest “A” share companies traded in China.  These are companies registered in mainland China whose stocks are traded on the Shanghai and Shenzhen stock exchanges.

CMC Market’s top CFD traders also looked to Finnish company, Nokia.  Shares in Nokia have more than doubled in price from very depressed levels in mid-July as investors embraced its smartphone link up with Microsoft and many of the savvy investors have seen real upside for the company in emerging markets given its lower cost smartphone offering.

The second most profitable company CFD was Shun Tak Holdings, a Hong Kong based property investor and developer with interests in both Hong Kong and Macau. It also has interests in cleaning services, transport and travel agencies. Shun Tak’s shares rose strongly last week as part of a broad based rally in China’s market and following broker upgrades based on an improved outlook for Macau.

Ric Spooner, Chief Market Analyst, CMC Markets, commented: “Our most successful CFD traders are confident and experienced enough to look beyond the mainstream trading instruments to those offering more international exposure.”

CFD Instruments traders by CMC’s most profitable clients over the last week include:

Top 10 traded CFDs (by profitability)

1.       AUD: USD

2.       China A50

3.       Nokia

4.       US SPX 500 ( S&P 500)

5.       Gold

6.       US 30 (Dow Jones Index)

7.       UK 100 (FTSE 100)

8.       EUR: USD

9.       German 30 (DAX)

10.   Shun Tak Holdings

CMC Market’s top traders also looked to the AUD:USD currency pair to produce the best returns from the available CFD currency instruments. The currency pairs that yielded the least profit for the top traders was the USD:JPY.

Ric continued: “Major currencies and leading share indices are traditionally among the most popular trading instruments among our clients. CFDs like the AUD:USD, EUR:USD, US 30 and Gold are highly liquid markets with tight spreads and trade either around the clock or with only a small break which makes them favoured instruments for short term traders.

“The German CFD (based on the DAX index) has grown steadily in popularity amongst our Australian client base. European economies have been an increasing source of focus for international economies since concerns over a possible break-up of the Eurozone began to mount in 2010. Opening at 6pm Australian time and being active during the Australian evening, makes the German and index particularly suitable for part time traders working during the day.”

The value of daily cash market trading in April was down slightly on the previous month’s strong performance, with an average traded value of $5.8 billion a day.

Activity in interest rate futures contracts continued its upward trend, although well down on the strong March expiry month, with trading during April in the four main contracts (3 and 10 year bonds, 90 day bank bills, and the 30 day cash rate) recording a daily average of 268,770 contracts traded.

AUSTRALIAN SECURITIES EXCHANGE

Listings and capital raisings

• In April 2011 there were 11 new listings, 57% higher than the 7 in the previous corresponding period (pcp).
• Total listed entities at the end of April 2011 were 2,238, up 3% on the 2,181 a year ago.
• There was $330 million of initial capital raised in April 2011, compared to $2.5 billion in the pcp.
• Secondary capital raisings in April 2011 increased significantly, with $6.1 billion raised, compared to $3.6 billion in the pcp. There was also $3.0 billion of other capital raised including scrip-for-scrip in April 2011.
• Total capital raised in April 2011 amounted to $6.4 billion, up 7% on the $6.0 billion raised in the pcp.
• For the financial year-to-date, total capital raised is down 26%, with capital raised from IPOs $23.5 billion and from secondary raisings $29.9 billion.

Trading – Cash markets (including equities, interest rates and warrants trades)

The All Ordinaries Index closed at the end of April at 4899.0 points, a fall of 0.6% over the course of the month. The index has risen 1.1% in the calendar year-to-date.

• Total cash market trades for April 2011 were 11.2 million, up 16% on the pcp.
• Average daily trades for April 2011 of 620,473 were 22% higher than the pcp.
• Total cash market traded value was $103.8 billion in April 2011, down 7% on the pcp mainly due to one less trading day. The daily average value traded was $5.8 billion in April 2011, down 2% on the pcp.
• In April 2011 the average value per trade was $9,296, down 19% on the pcp of $11,540. The percentage of traded value crossed was 28% (28% pcp).

Trading – Financial derivatives markets

• Strong turnover was seen in all benchmark interest rate futures contracts in April, even though volatility in markets declined compared to March where heightened volatility accompanied a number of major natural disasters.
• The RBA left the official cash rate unchanged at its April meeting. Market expectations of future policy changes were also largely unchanged over the month leading to narrower daily trading ranges across all contracts. Most key economic data was in line with expectations, with the exception of the stronger than anticipated CPI which created some volatility on the day of release.
• Commodity markets and the Australian dollar rallied throughout the month, with the dollar hitting a new post-float closing high of $US1.09.
• Equity derivatives volume (excluding the ASX SPI 200) for April 2011 was 1.9 million contracts, up 3% on the pcp, with a daily average of 103,067 contracts, up 8% on pcp.
• Total futures and options on futures contracts volume (excluding equity derivatives and CFDs) for April 2011 was 6.1 million, up 12% on the pcp, with a notional value of $3.1 trillion. Average daily contracts volume during April 2011 of 323,304 was up 18% on the pcp.       Page 3 of 6
• A total of 5,778 ASX CFD trades were transacted in April 2011, comprising a volume of 14.1 million contracts. The total notional value of all CFD trades for April was $218.4 million, a decrease of 8% on the pcp, while the value of CFD open interest at the end of April was $77.6 million, a decrease of 34% on the pcp.

Trading – Energy and agricultural derivatives markets

• A total of 12,587 Australian electricity futures and options contracts were traded in April 2011, a decrease of 22% on the pcp. Total open interest was 40,905 contracts at the end of April 2011.
• The ASX grain futures and options market traded 20,868 contracts (417,360 tonnes) during the month, down 21% on the pcp. Open interest at the end of April 2011 of 87,784 futures contracts represents 1.75 million tonnes of Australian grain and oilseed.

ASX CLEARING CORPORATION

Clearing

All on-market trades (equities and derivatives markets) are novated by ASX’s two central counterparty clearing subsidiaries, ASX Clear and ASX Clear (Futures), which act as counterparties to those trades and replace bilateral counterparty exposures.

• Total margins (including additional margins held against stress testing exposures and concentrated large positions) averaged $2.8 billion during April 2011 (including excess cash collateral but excluding equity securities lodged in excess of the margin requirement), with cash margins lodged averaging $2.2 billion.
• There were intraday margin calls made on two separate days in April 2011 totalling $8.0 million compared to intra-day margin calls in March 2011 totalling $75.8 million.

ASX SETTLEMENT CORPORATION

ASX Settlement

There were no delays to the completion of batch settlement in the equities market during April 2011.

• Total equity settlement delivery fail rates averaged 0.7% per day during April 2011 (no change from March 2011).

• The mining sector is now the primary driving force behind the Australian sharemarket. In terms of volumes of shares traded in March, mining volumes were double that of a year ago while the number of
  industrials shares traded were down by 4 per cent.
• In value terms, trading of industrials shares still dominate, but it has fallen in annual terms for the majority of the past year. Mining shares are up 37.2 per cent on a year ago.
• Over the past year the Small Resources index has soared by 25.9 per cent whereas the ASX 100 Resources index has lifted just 9.9 per cent.

What do the figures show and what does it mean?

• Forget about the banks, retailers, media stocks and technology, it is mining shares that are in vogue at present, driving both the volume and value of shares traded on the Australian Stock Exchange.
• In March, $85.8 billion industrials shares were traded, the highest amount since May last year. But in annual terms share trade was 5.1 per cent lower than a year ago. Trading in mining shares is still lower than industrials at $53.4 billion, but it was the second highest monthly total in three years and up a hefty 37.2 per cent on a year ago.
• The value of Industrials shares traded has only grown once in the past nine months while shares of mining shares traded has consistently grown, averaging 24 per cent annual growth.
• In volume terms, trade in mining shares took over from industrials in September last year. In March 2011, 49.5 billion mining shares were traded, up 97 per cent on a year ago. Industrials shares traded in March stood at 32.6 billion, down 4.4 per cent on a year ago. Trading in mining shares took off in August 2009, with annual growth averaging a staggering 80 per cent over the period.
• Over March the All Ordinaries and ASX 200 both rose by just 0.1 per cent. The ASX 100 Resources index was up by 1.9 per cent to the highest level since February 15 2011.

• Interestingly, the biggest Resources companies were most in favour over March; no doubt foreign investors were attracted in response to a weaker Aussie dollar. While the ASX 100 Resources index rose 1.9 per cent in March, the Small Resources index fell by 2.4 per cent. Still, the ASX 100 Resources index rose 9.9 per cent over the past year while the Small Resources index rose by 25.9 per cent. The Small Industrials index rose by just 1.7 per cent.

What are the implications for investors?

• There are two factors that investors need to focus on. The first is China – if investors continue to expect China will grow strongly and suck in resources then they will embrace large and small mining and energy shares.
• The other influence is the Aussie dollar. Whenever the Aussie loses ground, foreign investors come out of the cupboard, embracing large cap shares.
• And herein lies the distinction. Foreign investors must take into account the US dollar price of Aussie shares whereas domestic investors in smaller mining and energy companies don’t need to worry about currency factors – rather they focus on the outlook for individual companies.
• The Small Resources index began to outperform the large cap resources stocks (ASX 100 Resources) in September last year when the Aussie dollar recovered from the European debt crisis. The stronger Aussie proved a real barrier to foreign investor interest.
• Foreign investors own around 43 per cent of all Aussie shares so clearly the value of the Aussie dollar is important in purchasing decisions.

AXA APH is now wholly owned by the AMP Group.

The cash component of the share scheme consideration has been dispatched and new shares issued to the AXA APH minority shareholders under the share scheme.

Share scheme participants will receive the equivalent of A$6.431 per share comprising 0.73 AMP shares and A$2.5464 cash for each AXA APH share. They have also received AXA APH’s 2010 final dividend of 9.25 cents per share.

To provide the share component of the share scheme consideration, AMP issued 695,262,564 new ordinary fully paid shares in the capital of AMP Limited. AMP now has 2,789,686,764 ordinary shares on issue.

Trading of the new AMP shares commences on 31 March 2011 under the ASX code ‘AMP’.

Completion of the sale of AXA APH’s Asian businesses to AXA SA is expected to occur by Friday 1 April 2011.

USD consistently ranking as one of top three most actively traded ETFs

BetaShares passes $120 million in AUM three months after initial product launch

BetaShares Capital Limited (BetaShares) has announced that its US dollar exchange traded fund (ASX Code: USD) has quadrupled in size in the last month reaching $50 million in assets under management. The strong demand for this product has also resulted in BetaShares reaching another milestone, surpassing $120 million in AUM in just three months post the launch of its initial products.

Listed on 1 February 2011, BetaShares U.S. Dollar ETF tracks the performance of the US dollar (US$) relative to the Australian dollar (A$) using a simple, transparent and highly cost-effective structure backed by US dollars held in a bank account with JP Morgan Chase Bank.

Drew Corbett, Head of Investment Strategy & Distribution at BetaShares said the demand for the U.S. Dollar ETF has exceeded expectations and has consistently ranked as one of the top three most traded ETFs on the Australian Securities Exchange.

“We’re continuing to see strong demand from investors looking to back their view on the US$, particularly in light of the historically high levels of the A$ versus the US$ at present” he said.

Stephen Jani, Head of FX Sales at JP Morgan Chase Bank, said investor motives vary: “There are several reasons why investors want exposure to the US$ including participating in a potential US economic recovery, hedging future cross border business obligations and diversifying portfolio exposure. Whatever the reason, investor demand for the US$ is strong as evidenced by the success of the BetaShares product and growth in funds under management,” Mr Jani said.

The strong flows in the U.S Dollar ETF have also resulted in BetaShares reaching over $120 million in AUM since listing its initial products in December 2010.

“BetaShares was set up to address product gaps in the Australian ETF market and based on the strong demand of our ETFs to date, we believe we’re well on the way to achieving that goal,” Mr Corbett said.

“When you look around at ETF markets globally, there is always a strong local player tailoring solutions for the local investor. Reaching this milestone confirms BetaShares as that local provider and we look forward to innovating and delivering further ETF options for Australian investors,” he concluded.

Further information can be found at www.betashares.com.au and the ASX website.

With offices in London and New York, ISAM was founded by Stanley Fink, former CEO of the Man Group, in July 2008 to provide alternative investment strategies to institutions, family offices and private individuals.

When Stanley Fink joined Man, the organisation was a medium sized private company, largely focusing on agricultural commodity trading, with small operations in futures broking and hedge fund management. By 2008, when Stanley left to join ISAM, Man had a stock market capitalisation of $20B and managed alternative assets approaching $80B.

ISAM CEO Stanley Fink and his senior management team have established long term track records in the fund management industry and collectively bring decades of hedge fund experience to the Firm.

In February 2010 ISAM formally announced a strategic alliance with Hite Capital Management (HCM), the hedge fund firm founded by renowned systematic trading authority Larry Hite. The new venture resulted in Larry Hite and his key senior managers Alex Greyserman and Gilbert Lee becoming shareholders in ISAM.

The immediate benefit for ISAM was access to the Hite investment program that is now the Fund that was the subject of Zenith’s review.

Larry Hite and his team developed and refined the Fund’s strategy over the last 30 years, initially at Mint Investment Management Company and then at Hite Capital Management. For 15 of those years Mint had a successful joint venture with Man Group.

This period occurred during Stanley Fink’s tenure at Man.

“The ISAM Systematic Fund uses a combination of trend following and other quantitative investment techniques for currency and futures markets,” said Daniel Liptak. “The system operates 24hrs a day with trades generated automatically with pre-defined stop / loss orders in place.”

The investment objective of the Fund is to achieve capital appreciation through active management using purely systematic trend following models. The strategy seeks to capture profits from market price trends using a rules based platform.

The program has evolved over the last 30 years and is continually monitored and refined.

Today, the systems are applied to over 50 global financial and commodity futures markets and forward currencies.

The Fund targets a return of 15 – 20% per annum with volatility in the same range.

Daniel Liptak added, “For the purpose of Zenith’s review, the Alternatives Team have incorporated the track record of the Hite Futures Strategy and the performance of the Fund since inception.”

“As a result we have data back to June 2001, with an observed volatility of 19.34% with an annualised return of 18.27%, providing evidence that the program can be profitable, but not without risk.”

Zenith believes the strength of the Fund comes from the stability of the team that has built the investment program, the purity of its approach and, given the Fund’s AUM – the ability to follow trends in markets, such as commodities efficiently.

In addition to this, the partnership of Fink and Hite was successful in the past at Man Group and enhances Zenith’s confidence in the management of the business.

“Zenith is confident that the Manager clearly has identified trends and noticeably is able to efficiently and profitably trade them in a risk aware manner. The Manager does not dilute or smooth out the investment process with a broader range of investment strategies designed to reduce risk,” concluded Daniel Liptak.

Traders are showing greater signs of confidence and are tackling more adventurous investments according to the latest Share Trader Insights Survey launched today by CMC Markets Stockbroking.

CMC’s bi-annual Share Trader Insights Survey measures the trading behaviour of over 500 active share traders and compares the results with previous surveys conducted in 2010.

Overall, confidence is on the rise with 40% of traders planning to invest more money into the share market and only 18% are planning to do nothing – a marked drop from the 33% planning to sit on their hands in the H2 2010 survey. Trader confidence is also reflected by a spike in the number of investors wanting capital growth, rising to 30% from 25% since the last survey, while wealth preservation as an investment goal has fallen to 13% from 15%.

Banks and major resources companies such as BHP Billiton and Commonwealth Bank continued to dominate traders’ top 25 stock picks, but there were some signs of further diversification with companies such as Bluescope Steel, Qantas, Commonwealth Property Office Fund and JB Hi-Fi all increasing in popularity.

“The fact fewer investors are opting to sit on their cash is a strong sign of confidence. It’s a big departure from previous findings which showed investors were either cautious about trading or largely sticking to the large names in domestic equities,” said David Land, chief market analyst with CMC Markets. “Investors are again looking at share trading as a means to grow, rather than protect, their wealth.”

Getting savvy with social media

CMC Markets also surveyed traders’ use of social media and online tools for gathering information and increasing knowledge.

Online articles (22%) and online guides (15%) are the most important sources of information for increasing trading knowledge, followed by more traditional media forms including personal finance magazines (13%), newspapers (13%) and trading magazines (10%). According to the survey, trading tips are most in demand (19%), followed by analyst reporting (14%) and commentary (12%).

Looking at social media, trading websites are the most popular forms of social media for increasing their level of investment knowledge (used by 57% of traders) with forums, blogs and webinars also high on the list.  Facebook gained favour with only 9% of traders and was marginally more popular than Twitter with 8%. By age, 25 -34 year olds comprised almost half of traders who used Facebook and 59% of those who used Twitter were under 35. Meanwhile investors aged 45 and over were more likely to use an iPhone.

“The research confirms the social media phenomenon is extending to our trading habits with trading websites and i-Phone apps considered a useful source of information. This is consistent with our experience; CMC has seen a steady increase in traffic to our online trader tips and blogs,” said Mr Land.

SGX gets thumbs down while Chi-X more warmly received

Traders were also quizzed on their reaction to current events including the proposed takeover of the Australian Securities Exchange (ASX) by the Singapore Stock Exchange (SGX) and the entry of alternate exchange Chi-X to the Australian market.

Only half of investors knew the ASX is a publicly listed company and 24% think it is government owned. Therefore it’s not surprising 32% said they were opposed to the takeover, 35% were supportive and 32% were neutral.

By contrast, 43% were neither opposed or supportive of Chi-X, 35% were supportive and only 22% were actually opposed.

“The fact people don’t mind another entrant into the market, yet are opposed to a takeover of the ASX tells us there is much emotion and nationalistic sentiment tied to the ASX with many people believing it’s a state-owned asset of national significance,” said Mr Land.

Herd Index shows timing the market is still tricky for traders

The survey also encompasses the CMC Markets Herd Index, which measures trading patterns against market movements. The Herd Index has continued the pattern of previous surveys with 44% of traders moving money into the market during January 2011 as the All Ordinaries Index rose.

“The Herd Index shows investors are continuing to move money in to the market when it is on its way up, then out when its going down, meaning they are entering and exiting at the wrong times,” Mr Land said.

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Traders are showing greater signs of confidence and are tackling more adventurous investments according to the latest Share Trader Insights Survey launched today by CMC Markets Stockbroking.

CMC’s bi-annual Share Trader Insights Survey measures the trading behaviour of over 500 active share traders and compares the results with previous surveys conducted in 2010.

Overall, confidence is on the rise with 40% of traders planning to invest more money into the share market and only 18% are planning to do nothing – a marked drop from the 33% planning to sit on their hands in the H2 2010 survey. Trader confidence is also reflected by a spike in the number of investors wanting capital growth, rising to 30% from 25% since the last survey, while wealth preservation as an investment goal has fallen to 13% from 15%.

Banks and major resources companies such as BHP Billiton and Commonwealth Bank continued to dominate traders’ top 25 stock picks, but there were some signs of further diversification with companies such as Bluescope Steel, Qantas, Commonwealth Property Office Fund and JB Hi-Fi all increasing in popularity.

“The fact fewer investors are opting to sit on their cash is a strong sign of confidence. It’s a big departure from previous findings which showed investors were either cautious about trading or largely sticking to the large names in domestic equities,” said David Land, chief market analyst with CMC Markets. “Investors are again looking at share trading as a means to grow, rather than protect, their wealth.”

Getting savvy with social media

CMC Markets also surveyed traders’ use of social media and online tools for gathering information and increasing knowledge.

Online articles (22%) and online guides (15%) are the most important sources of information for increasing trading knowledge, followed by more traditional media forms including personal finance magazines (13%), newspapers (13%) and trading magazines (10%). According to the survey, trading tips are most in demand (19%), followed by analyst reporting (14%) and commentary (12%).

Looking at social media, trading websites are the most popular forms of social media for increasing their level of investment knowledge (used by 57% of traders) with forums, blogs and webinars also high on the list.  Facebook gained favour with only 9% of traders and was marginally more popular than Twitter with 8%. By age, 25 -34 year olds comprised almost half of traders who used Facebook and 59% of those who used Twitter were under 35. Meanwhile investors aged 45 and over were more likely to use an iPhone.

“The research confirms the social media phenomenon is extending to our trading habits with trading websites and i-Phone apps considered a useful source of information. This is consistent with our experience; CMC has seen a steady increase in traffic to our online trader tips and blogs,” said Mr Land.

SGX gets thumbs down while Chi-X more warmly received

Traders were also quizzed on their reaction to current events including the proposed takeover of the Australian Securities Exchange (ASX) by the Singapore Stock Exchange (SGX) and the entry of alternate exchange Chi-X to the Australian market.

Only half of investors knew the ASX is a publicly listed company and 24% think it is government owned. Therefore it’s not surprising 32% said they were opposed to the takeover, 35% were supportive and 32% were neutral.

By contrast, 43% were neither opposed or supportive of Chi-X, 35% were supportive and only 22% were actually opposed.

“The fact people don’t mind another entrant into the market, yet are opposed to a takeover of the ASX tells us there is much emotion and nationalistic sentiment tied to the ASX with many people believing it’s a state-owned asset of national significance,” said Mr Land.

Herd Index shows timing the market is still tricky for traders

The survey also encompasses the CMC Markets Herd Index, which measures trading patterns against market movements. The Herd Index has continued the pattern of previous surveys with 44% of traders moving money into the market during January 2011 as the All Ordinaries Index rose.

“The Herd Index shows investors are continuing to move money in to the market when it is on its way up, then out when its going down, meaning they are entering and exiting at the wrong times,” Mr Land said.

The post Confidence returns as traders get active and more adventurous, CMC Markets survey says appeared first on AdviserVoice.

AMP Chief Executive Officer Mr Craig Dunn said the vote was a significant milestone for the proposed merger.

“A merged AMP AXA will bring together two of Australia’s longest standing businesses. It will deliver a new force in financial services by creating a company with the size and resources to be a strong competitor to the big four banks in wealth management.

“Today’s vote brings the competitive benefits of this merger one step closer for consumers and businesses in Australia and New Zealand,” Mr Dunn said.

Under the Scheme of Arrangement to give effect to the proposal, AXA APH shareholders will receive the equivalent of A$6.43 per share.

The second court hearing to approve the Scheme will take place on Monday 7 March 2011. If approved, the Scheme will become effective on 8 March 2011. , consisting of cash and AMP shares. AXA APH shareholders will also receive AXA APH’s 2010 final dividend of 9.25 cents per share.

Normal trading of new AMP shares issued to AXA APH shareholders under the Scheme would then commence under the ASX code “AMP” on 31 March 2011.

The recent geo-political tension in the Middle East and Northern Africa has again highlighted the sensitivity of crude oil prices to supply threats, with WTI crude oil climbing close to $100 per barrel recently.

There is speculation as to how high it can go and so far analysts have capped the price rise to a maximum of $140-$150 a barrel. However Ben Le Brun, market analyst at CMC Markets, says it could react more aggressively if there is an actual supply disruption as opposed to a threatened disruption. At this stage OPEC has kept the world well supplied and does have the ability to pick up any slack but things could soon change as the region is responsible for supplying 36 percent of the world’s oil, Mr Le Brun says. He has conducted a 20 year analysis which shows it is not usual for oil prices to double during times of crisis: But traders should use caution if trying to profit as the price can swing about wildly and unpredictably in times of crisis.

• During the Yom Kippur War the price of crude oil went from $3.00 per barrel in 1972 to $12.00 by the end of 1974. The Yom Kippur War sparked an oil export embargo by several countries and resulted in a loss of 7 percent of the free world oil production. This oil embargo made prices extremely sensitive, increasing 400 percent in six months. In today’s terms that would be equivalent to the WTI oil price hitting $360 a barrel
• The Iranian revolution and the Iraq-Iran War again highlighted the rise in price caused by actual as opposed to threatened supply disruptions. Crude oil prices more than doubled, increasing from $14 in 1978 to $35 per barrel in 1981.
• The price of oil again spiked in 1990 when the onset of the Gulf War and its proximity to the world’s largest producer, Saudi Arabia, put oil production in jeopardy. The price went from $21 in July 1990 to $46 by mid October. This spike was much less than some had anticipated but the price did double with fears.
• After September 11 2001 and the outbreak of the Afghanistan war the price of oil was initially sold off. It was not until the start of the Iraq War II in 2003 that OPEC had to ramp up production of oil to keep the supply chain going. Prices actually went down at the outset of the Iraq war with most traders predicting a swift end to the conflict but by late 2003 the oil price began to rise as insurgent activity began to affect the oil supply. Prices hovered around $30 when OPEC cut production and in 2004 hit $40 a barrel. OPEC subsequently raised production but terrorists targeted oil supply and later in the year oil touched $50.

The big picture

• The role of a business economist is to educate, inform and occasionally entertain. But most people merely want business economists to explain what key issues mean in practical terms.
• And the one concept that most people want to understand is the terms of trade. Simply, the terms of trade relates the prices that we receive for our exports to the prices we pay for imports. If we get paid more for our exports and we pay less for our imports, it means that we are – collectively – better off. It means more income for Australians.
• The Reserve Bank constantly notes that the extra income being received because of the high terms of trade is a key source of concern, but most don’t know what that has got to do with them. And rightly so because the gains aren’t easy to see and aren’t distributed evenly.
• But since 2004 when the terms of trade started to lift in a meaningful way, our exports have increased by $34 billion, with the extra income from higher prices totalling $23 billion and volumes up $11 billion. Over the same time imports rose by almost $22 billion with almost all the increase in extra volumes – we effectively paid no more but also paid no less in net terms over the period in response to price changes.
• Most of the income gains have gone to businesses – in the form of increased revenue, higher profits, cheaper inputs and savings on new equipment. But consumers have also done well with the higher Australian dollar making imported goods more attractive.
• If businesses and consumers use the increased revenue and cheaper prices to boost spending on a raft of domestic and foreign goods and services then the Reserve Bank would be worried. In other words there would be more money chasing the goods and services on offer, potentially driving up prices and economy-wide inflation.
• But if businesses and consumers instead use the terms of trade gains to cut debt levels and boost savings then the Reserve Bank has less to worry about. And that is precisely what has been happening.
• So don’t let anyone tell you that interest rates will need to go up because the terms of trade is rising. It depends whether the extra income is spent or saved, and the latter continues to dominate, serving to minimise the inflation risk. The Reserve Bank has been at pains to point this out, but it has had mixed success in getting the message through – even to the business and media economists that should know better.

The week ahead

• It comes around every three months – the time when the stars appear to align and we are bombarded by what appears to be every imaginable economic statistic.
• The ‘autumn avalanche’ kicks off on Monday with data on private sector credit (lending), home prices and the Bureau of Statistics (ABS) business indicator series. The latter includes figures on inventories, profits and sales.
• On Tuesday the Reserve Bank Board meets to decide interest rate settings – but no change is required or expected. Also the quarterly balance of payments data is released the same day together with government finance, retail trade and the performance of manufacturing survey. Retail trade is expected to grown by 0.3 per cent in January but the floods may have distorted the results.
• On Wednesday, GDP or economic growth estimates for the December quarter are released. At this early stage (key components will be released over the next few days) we estimate that the economy grew by 0.7 per cent in the quarter after an anaemic 0.2 per cent increase in the September quarter. There is the risk that a ‘technical recession’ may be revealed in the GDP numbers over the next year – two consecutive quarters of economic contraction. As noted, this would be more of a ‘technical’ event – influenced by floods and cyclones – but it will serve to keep the Reserve Bank on the interest rate sidelines for longer.
• On Thursday data on building approvals and international trade are released. Again the figures will be affected by the floods. Building approvals probably rose 3 per cent while a trade surplus of $1.5 billion is expected.
• In the US, the first Friday of the month is notable because it is when monthly employment data is released. And after disappointing figures in the last couple of months, there is a lot riding on the upcoming February data. The good news is that economists tip an improvement with non-farm payrolls expected to lift by 160,000, although the unemployment rate may edge up from 9.0 per cent to 9.1 per cent. Nevertheless the results should encourage investors and thus keep the bull market alive.
• Turning to the other data, personal income and spending figures are released on Monday together with pending home sales and regional manufacturing gauges for New York and Chicago. On Tuesday the ISM manufacturing survey is released together with construction spending and car sales. The Federal Reserve Beige Book is released on Wednesday with the ADP employment index and Challenger job layoff series.
• On Thursday the ISM services index is issued while factory orders data is released on Friday alongside the nonfarm payrolls data.
• Also of note, the Chinese purchasing managers for February will be released on Monday. Investors hope for solid, but not sensational growth.

Sharemarket

• No doubt the post-mortems are about to start – with analysts and investors alike dissecting the results from the profit-reporting season. But overall the simple conclusion is that the earnings results have been very mixed. And understandably so. Consumers haven’t been spending, forcing businesses to slash prices and margins, and ultimately depressing earnings. There have also been headwinds provided by the lofty Australian dollar – not just for those with significant overseas operations – but also for retailers, contributing to price deflation at home. The ongoing strength of the Chinese economy has lifted mining revenues but it has also caused headaches for companies – what to do with all the cash? In aggregate, though, profits by ASX 200 companies rose by around 40 per cent over the past year, so it is clear that Corporate Australia is in fundamentally strong shape.

Interest rates, currencies & commodities

• The tensions in the Middle East and Africa have caused oil and gold prices to gyrate and injected more life into equities markets, but currency markets have been relative immune from the volatility. The Aussie dollar continues to hover near parity against the greenback although it has lost some ground against the Euro. The inflation hawks at the European Central Bank have been rattling sabres, threatening to push up interest rates, despite many countries in the process of implementing austerity measures to get debt and budget deficits under control.
• Financial markets are preparing for a long period of inaction by the Reserve Bank on interest rates. The Reserve Bank Governor has noted the “reasonably lengthy” periods in the past of “sitting, waiting and watching.” Shortterm interest rates have barely budged over 2011 with physical 90-day bill yields holding close to 4.90 per cent, modestly above the 4.75 per cent cash rate.
• It’s important to highlight the conflicting forces acting on world oil markets. On the one hand there are the tensions in the Middle East and Africa, raising concerns about potential disruptions of crude oil supplies – especially into Europe. Speculative forces have also been active in pushing up Brent prices. But on the other hand, China is attempting to slow its economy, US gasoline inventories are near 21-year highs and OPEC is intimating that some members may be allowed to lift production if there are disruptions to global supply. The Australian petrol price may be near 28-month highs, but interestingly the $1.35 per litre average price is not far above the 5-year average of $1.28 a litre.