Markets Update – August 31

Overnight market action

  • US stocks fell with investors too worried about high gas prices and stagnant employment to be impressed by higher consumer spending. The Dow Jones industrial average closed down 106.77 points, or 0.8 per cent, to 13,000.71. The Standard & Poor’s 500 fell 11.01 points, or 0.8 per cent, to 1,399.48.
  • European stocks tumbled on downbeat eurozone business and consumer confidence and as expectations dimmed that US Federal Reserve chairman Ben Bernanke will signal fresh economic stimulus. London’s FTSE 100 index dropped 0.42 per cent to 5,719.45 points. Paris’s CAC 40 lost 1.02 per cent to 3,379.11 points and Frankfurt’s DAX 30 tumbled 1.64 per cent to 6,895.49 points.
  • The Australian market is set for a lower start on Friday as world markets dropped due to caution ahead of a highly anticipated speech by the head of the US central bank. At 0723 AEST on Friday, the September share price index futures contract was down 18 points at 4,287.

Strategy and economics

  • Australian Iron Ore Majors – Pressures rise as prices fall
    • While we expect a recovery in due course, we look at the financial stresses and valuation implications of lower iron ore prices, should they last.
    • We anticipate massive ~50% and ~80% cuts to 2013 earnings for BHP and RIO respectively if iron ore price persist at current sub US$100/t levels.
    • While the market’s funding concerns focus most on FMG, we note that both BHP and RIO would also have to adapt to a new ‘lower for longer’ environment.