Friday, 29 February 2008

XAO Declines For 4th Straight Month

It was a close call but as predicted last month the XAO finished down for the month of February falling by -0.4%. That makes 4 straight months of declines. The first time that has happened since 1992 when the XAO fell for 5 consecutive months from June to October.

Despite some good earnings reports the market seemed more interested in focusing on problems in the financial sector. It's difficult for the market to rise without the cooperation of the banks and that is exactly what has happened since the XAO put in it's lows back on January 22nd.

You can see from the chart above that whilst the XAO has risen almost 9% since it's lows of January 22nd, the major banks have continued to fall, CBA the worst affected dropping -14% since that date. Other big financial names to suffer since January 22nd include MQG and QBE.

So what does next month bring? With earnings season behind us, economic data may prevail domestically. Whilst business sentiment turned down in February economic data should be continue to show a strong underlying Australian economy. However expectations that the RBA will hike rates in March (currently at 83% for a 25bps rise) and a continued hawkish tone, may keep the markets in a cautious mood.

Overseas, US economic data continues to show a deteriorating economy, it's hard to find a single economic data point that looks positive. As usual next Friday's non-farm payroll data will be watched closely.

Also earnings from the likes of Goldman Sachs and Morgan Stanley will be scrutinized by the market for possible writedowns. Yesterday's big $11 billion writedown taken by AIG is a reminder that we are nowhere near the end of the writedown process with US financial institutions.

As usual then, the call on the likely direction of the XAO in March is any body's guess. As stated before, not since 1992 has the XAO fallen 5 months in a row. However, whilst the odds of a further decline in March seem unlikely, I'm going to stick with the trend and bet that the XAO finishes lower at the end of March.