MARKET CLOSE
(4.30pm AEST)

It was a less than desirable start to the week for equities, with the ASX 200 index (XJO) falling 1.6 pct or 72.4 pts to 4582.3 while the broader All Ordinaries index (XAO) has dropped 1.5 pct or 69.2 pts to 4646.8. Almost all market segments ended in lower territory by the close of business.

This makes it only the second time in five days that Australian equities have lost value. Most sectors lost at least 1 pct with the financials dropping close to 2 pct. On a positive note, Aussie shares have improved for three consecutive weeks with a gain of 1.4 pct last week.

The Australian government announced its carbon tax package yesterday which will be digested by the market in the coming days and weeks. A new tax on carbon emissions of $23 a tonne has been proposed for the 500 most polluting companies from July 2012.

Despite Australia only emitting a small percentage of the carbon that other larger nations such as China and the United States produce, keep in mind that per capita Australia emits several times what the average Chinese citizen does. Australia is heavily reliant on coal for its electricity production and the commodity is one of the country's biggest exports along with iron ore.

Among the 500 largest carbon emitters in Australia are the majority of the big miners and oil and gas producers in addition to most of the country's largest corporations.

You could expect significant commentary from politicians on both sides of the equation in addition to companies sharing their points of view with the public. Australia's largest steel producer, BlueScope Steel (BSL), acknowledged the government's decision to provide $300 million in financial assistance to the steel industry.

Despite both BSL and OneSteel (OST) expected to receive significant compensation from the government, both their share prices fell sharply. BSL fell 6.67 pct or 9 cents to $1.26, trading close to its lowest level this month. OST has slumped by 4.93 pct or 10 cents to $1.93.

The S&P/ASX 200 Materials index fell 1.44 pct or 198.2 pts to 13608.5. Commodity prices fell sharply on Friday. The price of oil fell by 2.5 pct following on from some worse than expected employment figures in the U.S, with its unemployment rate sitting at 9.2 pct. This compares to the 4.9 pct jobless rate in Australia. The world's third largest miner, RIO Tinto (RIO) lost 1.36 pct or $1.15 to $83.20, while BHP Billiton (BHP), which is almost four times as large, dropped 1.45 pct or 65 cents to $44.30.

All were not pleased with the carbon tax however, with RIO making its dissatisfaction with the new tax clear in a press release which stated that "Rio Tinto is disappointed with the Australian Government's carbon tax proposal, warning it will inevitably hinder investment and jobs growth in Australia without reducing global carbon emissions."

The airlines also pulled back after the strong gains posted last week. Australia's largest airline, Qantas (QAN) said that the new carbon tax will force domestic airline fares to rise. Qantas (QAN) shares slumped by 3.25 pct or 6.5 cents to $1.93 today, however have still improved by 4 pct over the past month.

Virgin Blue (VBA) dropped 2.86 pct or 1 cent to 34 cents. Take into account that last week, VBA rose by over 20 pct following the grounding of Tiger Airways.

There have been some estimates that the carbon tax could cost QAN as much as $100 million next financial year.

QAN long-haul pilots have also elected to take industrial action. The pilots' union said that a strike would be a last resort if an agreement is not reached.

Australia's second largest airline, VBA said that in the 2013 financial year the cost to the company due to the carbon tax could be around $45 million. VBA also said that "these costs will be passed in full to consumers. Initial modelling indicates an average domestic fare increase per flight sector of approximately $3 which will vary depending on sector length."

Australia's largest telecommunications company, Telstra (TLS) closed 0.67 pct or 2 cents higher to $3.02. It closed above the $3.00 mark for only the second time in a fortnight.

On the rural front, U.S grain markets rose strongly on Friday night. The price of wheat jumped 2.5 pct, finally improving after a five-week losing streak which has seen the price of wheat dropping 20 pct in the process.

News Corp (NWS) fell 5.07 pct or 85 cents to $15.92 taking the falls for the past three sessions to 7.2 pct. This follows on from the phone hacking scandal that the 168 year old U.K tabloid newspaper, News of the World has had to deal with.
In other news, it is expected that Australian cheese maker, Bega Cheese will list on the ASX and is looking to raise around $36 million from the float.

On the economic front today, housing finance data was released. The data measures the number of new home loans granted for owner-occupied homes last month.

The number of new home loans granted for owner-occupied homes last month rose by a slightly less than expected 4.4 pct. Commsec Economist, Savanth Sebastian said: "The latest improvement in the housing finance figures is certainly a welcome sight. Over the past six months the housing sector has come off the boil, and while the second consecutive month of healthy gains is encouraging, it is off a very low base. No doubt the fact that interest rates have remained on hold for just over half a year has given potential buyers a degree of confidence to once again look at property as an attractive investment."

The Australian Institute of Petroleum (AIP) released its latest weekly petrol price reading today and showed that prices at the pump fell by 1.3 cents to 138.9 cents a litre last week. Unfortunately, the Singapore unleaded price (which petrol prices in Australia are closely linked to) have risen by around US$15 in July. Mr Sebastian said that "...CommSec expects pump prices to lift by 5-7 cents a litre over the next two weeks."

Markets in the region are also lower although not as significantly as Australian shares. Japan's Nikkei 225 index is down 0.68 pct or 68.48 pts to 10069.25, Hong Kong's Hang Seng is down 0.89 pct or 72.51 pts to 18785.53, South Korea's KOSPI index is off 0.82 pct or 17.82 pts to 2162.53, while China's Shanghai Composite index is up 0.11 pct or 3.11 pts to 2800.17.

Last Friday, Japan released its latest investor sentiment reading which showed that people involved in watching the Japanese economy are a little more confident than was previously expected.

Household confidence in Japan was released today at 3pm (AEST) and showed that the Japanese consumer's confidence levels have improved slightly however still came in lower than expectations at 35.3.

Looking ahead to the rest of the week, China will be releasing the majority of its monthly economic data on Wednesday including its latest growth reading and retail spending.

Tomorrow, Japan will announce its decision on interest rates which are expected to remain unchanged at less than 0.1 pct. Interest rates have remained at their current levels in the world's third largest economy since October last year.

On Wednesday, South Korea will release its latest employment numbers, including the jobless rate which the market is expected has inched its way higher from 3.3 pct to 3.4 pct last month. This compares to Hong Kong's unemployment rate of 3.5 pct, China at 6.1 pct, Japan at 4.7 pct, India at around 11 pct, Indonesia at 6.8 pct, Malaysia at 3 pct, Singapore at 1.9 pct, and Taiwan at 4.4 pct.

EU, US Market Indicators

European shares also pulled back by around 1 pct on Friday. The International Monetary Fund (IMF) approved $4.5 billion in Greek financial aid over the weekend after the European Union already approved around $8 billion recently.

It will be relatively quite in European trade in relation to economic news, with France releasing its industrial production reading for last month at around 5pm (AEST).

This week, European officials (including the European Council, European Commission and the European Central Bank) will meet to discuss the possibility and risks of Italy being the next casualty of excess debt problems in the Eurozone.

Looking ahead, the results of the second round of European bank stress tests will be out this week. These tests aim at finding out which financial institutions in the Eurozone have the most exposure to sovereign debt and how they would perform in another downturn. Note that there has been considerable scepticism when it comes to the accuracy and usefulness of these tests.

U.S markets fell on Friday off the back of some worse than expected job numbers. On Thursday night, a jobs report showed that the number of jobs created in the private sector rose more than expected which resulted in an improvement in stocks.

But on Friday night, the U.S government released its latest official numbers which tends to have more of an impact on stocks. The U.S unemployment rate rose from 9.1 pct to 9.2 pct last month (which is 4.3 pct higher than the Australian rate). On a positive note, U.S shares rose for the second consecutive week.

There were only 18,000 jobs added last month, whereas the market was expecting close to 100,000 jobs to have been created. According to the report released by the U.S Bureau of Labor Statistics, "Among the major worker groups, the unemployment rates for adult men (9.1 percent), adult women (8.0 percent), teenagers (24.5 percent), whites (8.1 percent), blacks (16.2 percent), and Hispanics (11.6 percent) showed little or no change in June. The jobless rate for Asians was 6.8 percent, not seasonally adjusted." It is unique and perhaps slightly strange that the U.S report separates the results based on race.

It will be a big week in the U.S because the second quarter earnings season kicks off tonight with Alcoa (AA;us). Alcoa is the world's third largest producer of aluminium. Around 20 major companies will post their results over the next five days.

The likes of JPMorgan Chase (one of the world's largest investment banks), Citigroup (C;us), Google (GOOG;us), YUM! Brands (the owner of KFC, Pizza Hut and Taco Bell), Hotel group Marriot International and toy maker, Mattel will all release their second quarter earnings results this week.

The third quarter outlook and commentary by these companies will set the mood for the remainder of the earnings season. Earnings of around 32 cents a share is expected for Alcoa. AA;us last traded at US$16.38.

LivingSocial, the online coupon website is expected to float in the U.S and is hoping to raise around $1 billion in the process. The company is a competitor of Groupon which is also expected to list at some point.

On the economic front this week in the U.S, a retail spending report will be released as will the latest trade balance (difference in value between imported and exported goods) tomorrow night. No major economic data is scheduled for release in the U.S tonight.

Despite the significant fall in the Australian market today, activity remained lower than usual. The volume of shares traded came in at 2.17 billion today, worth only $3.99 billion. 385 shares were up, 691 finished weaker and 354 ended unchanged.

At 4.30pm AEST on the Sydney Futures Exchange, the ASX24 futures contract is down 1.72 pct or 80 pts to 4560.

Most major European markets trade between 5pm (AEST) and 1.30am (AEST). Futures in Europe are pointing to a weaker start to trade.

Dow Jones futures are lower, indicating that U.S shares will start in negative territory when American markets open at 11.30pm (AEST).

Turning to currencies, the Australian dollar has lost ground and currently buys US106.9 cents, JPY86.4 and EUR75.5 cents.

One of the best performing shares was Ferrum Crescent (FCR), which rose 48.28 pct or 7 cents to 21.5 cents. FCR is a base metals and gold explorer with most projects in the Northern Territory and Western Australia. It has a market capitalisation of $62.8 million and was first listed on the ASX in 2005.

Steven Daghlian
Commsec Market Analyst