THE WEEK AHEAD: Waiting for an RBA lead

The first quarter of 2010 is almost over. Scary, isn’t it, with Easter fast approaching? But it is an opportune time to take stock. And the biggest change this year compared with 2009 is the reduction in volatility. The healing process is well underway on global markets. And even with the storm in the tea cup over Greece, financial markets have been much better behaved compared with last year.

Take the currency markets. There hasn’t been a defining trend since the start of the year. In fact, nearing the end of the quarter the situation is very mixed. Of the 120 currencies that CommSec has monitored, 36 currencies are stronger against the greenback, 37 are unchanged and 47 are weaker.

The strongest currency across the globe is the Colombian peso, up almost 7% against the US dollar. But also represented in the top group are central and Latin American currencies, including those from Mexico, Costa Rica and Guatemala. Asian currencies are also in the leading pack, including Malaysia, Japan, Indonesia and South Korea. The Aussie dollar is currently 13th strongest, building on its fifth position in 2009.

In terms of the weakest currencies, the bottom grouping is dominated by African countries with the Ugandan Shilling down almost 9% against the greenback. The UK pound is the weakest of the major currencies, down around 5%, with the Euro down just over 4% against the US dollar.

Looking at world sharemarkets, the Ukraine is on top so far in 2010, building on its strong gains in 2009. In 2009, the Ukraine PFTS almost doubled, lifting by just over 90%. And so far in 2010, the Ukraine sharemarket has expanded another 45%. Eastern Europe dominates the top of the leader-board with Estonia, Romania, Lithuania, Latvia and Hungary all among the best performers.

At the bottom of the leader-board is Slovakia (down 9%) together with Slovenia. European countries with high debt levels – Greece, Portugal and Spain – also have under-performing sharemarkets so far in 2010. The Australian sharemarket is also among the laggards so far in 2010, in 58th position of 72 bourses, with its flat performance.

In terms of interest rates, Australia remains amongst the high-yielders. Of 53 countries monitored, Australia has the 12th highest short-term rates (90-day bill yields) and is also 12th highest of 44 countries with its 10-year government bond yield.

Venezuela and Pakistan have the highest short-term rates in the world at 15.3% and 12.3% respectively. Hong Kong and the US have the lowest interest rates, near 0.15%.

The week ahead

With an absence of ‘top shelf’ market-moving economic data, it will be up to the Reserve Bank to provide the colour and light in the coming week. But investors will have to wait until late in the week to get the words of wisdom.

On Thursday, Reserve Bank Assistant Governor Philip Lowe addresses the AIG economic forum while the Financial Stability Report is released the same day. On Friday the Reserve Bank Governor, Glenn Stevens, gets his chance to front the lectern. No topics have yet been nominated for either speech. But given that an April rate hike is regarded as a 50/50 proposition, investors will be hoping for some subtle hints on the next policy move.

In terms of economic data, the calendar is hardly packed with indicators. On Monday car sales data is released while demographic statistics are issued on Thursday with the financial accounts on Friday.

Car sales probably fell 1.5-2% in February in seasonally adjusted terms after dropping by 3.4% in January. Effectively this is the payback or hangover effect after the Government’s tax break for small business ended in 2009. But the softening of car sales has been quite modest so far, cushioned by the cut in tariffs for imported vehicles and cheaper new car prices. Actually car sales are back to the levels of five years ago and well above five-year averages.

The demographic data will confirm that Australia’s population is still growing at the fastest rate in around 40 years. While there are some groups pushing for limits to Australia’s population growth, they clearly haven’t done all their homework. Australia can, and should, have a bigger population, provided that the process is well planned.

The financial accounts include a raft of information including the financial wealth of households and the share of listed shares owned by superannuation funds. Super funds have been holding a high proportion of assets in cash and fixed term investments, but that decision could weigh on financial performance in the longer-term.

In the US, there are certainly more indicators to monitor than on offer in Australia, but it is by no means a packed program. On Tuesday existing home sales data is issued together with the FHFA house price series. On Wednesday both durable goods orders and new home sales are slated for release. And on Friday, the final estimate of economic growth (GDP) for the December quarter is published together with the final estimate of consumer sentiment for March.

Overall, economists are looking for little change in home sales readings for February. Existing home sales may have eased from 5.05 million to a 5 million annual rate. And new home sales are tipped to have lifted from 309,000 to 315,000.

Of the other indicators, orders for new long-lasting (durable) goods like home appliances probably edged 0.5% higher in February, with GDP growth near a 5.9% annual rate and consumer sentiment still soft near a reading of 72.5.

Overall, the US economy is still in the healing process, but given its injuries, it will take some time to get back to full health.

Sharemarket

When judged on historic earnings, global sharemarkets appear somewhat pricey. That is understandable. The North American financial crisis depressed global economic growth, and in turn, corporate earnings. According to data collated by FactSet, the World sharemarket is trading on a PE of 16.9 at present, in line with decade averages. But 38 of the 72 countries and regions currently have PE ratios above decade averages.

But when earnings projections for the next financial year are used, the picture changes. The forward PE ratio for the world sharemarket falls to 15.76 – the lowest in a year and just over 10% below decade averages. And on the forward PE measure, only 27 of the 72 markets have ratios higher than decade averages.

On the forward PE measure, Australia would appear to be well priced. Australia’s forward PE currently stands at 15.90, in line with decade averages. This probably accounts for the flat performance of the sharemarket over 2010 and sideways trend over the past month. Greece and Spain are seen as the cheapest markets while Indonesia, Brazil and China are among the dearest.

Interest rates, currencies & commodities

Given all the focus on coal and iron ore, we tend to forget just how well the rural sector is performing at present. ABARE, the government’s chief forecaster, expects real net farm cash income to soar by 62% in the current financial year before easing around 9% in the coming year. While prices received by farmers are expected to be down for the second straight year this year, down by 2.8%, prices paid by farmers will be down more, lower by 3.8%.

The farm sector is also expected to be contributing to Australia’s export performance this year with real exports up 3.6%, ahead of an expected flat result in 2010/11. Overall, commodities will be a solid contributor to our export performance with real exports tipped to rise by 6.3% this financial year ahead of a further 5.1% gain in 2010/11.

Craig James is chief economist at CommSec.