Share Market Wrap 7th Dec 07
While the recent sub-prime mortgage market meltdown has created significant volatility in the share market, it has also brought with it the graphic realisation of the close relationship that exists between the share and cash markets. One such relationship is the currency carry trade between the Australian dollar and Japanese Yen, which involves borrowing Japanese Yen at low interest rates to invest in high growth investments in the Australian markets. While the Australian dollar was rising against the Japanese Yen, which it did by slightly under 14% to the end of October, this strategy was proving to be very profitable. However, in November the Australian dollar fell away against the Yen to around 4% eroding any gains and in turn reducing the inflows of cash into the Australian markets. Obviously many investors would be considering whether they would continue with this strategy or if they should pull their money out. If this occurs we may see some downward pressure on the Australian cash and share markets. That said I expect the Australian dollar to strengthen in the not to distant future, therefore I do not believe there is cause for concern right now.
So what can we expect in the market?
As expected the market has risen this week and is looking surprisingly strong given that we have now experienced a 5 per cent rise in the past two weeks, with more than half of the rise occurring this week. Even though the market looks bullish right now there is still a high probability of it turning to fall away in late December or January, which may just result in the current rise becoming what is known as a ‘suckers’ rally. If the market does continue to rise throughout next week, my opinion may change to being more bullish as there is still a small probability that the market may rise through to late December or into mid January and make a new all time high. As I have said previously, right now it pays to be conservative. While there a number of stocks looking quite bullish, it may benefit the inexperienced to wait for the market to decide on a direction before investing.
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