Market barometer: New round of rate increases loom

Friday 15th September 2000

The oil pre-crisis has been attracting widening attention as even the supereconomies cry poor to Opec. At the same time many central banks have been tightening interest rates to deal with inflationary pressures from other quarters.

A lift in petrochemical prices could threaten significant upward pressure on inflation worldwide and trigger a new round of interest rate increases to the detriment of sharemarkets across 2001.

The soft landing central banks have aimed for may yet turn into a dull thud but governments could cut fuel taxes to offset Opec's gains.

New Zealand's export-led recovery could be a smoke-and-mirrors affair now a lift in the US dollar price of oil has occurred at a time of currency collapse. Closing the gaping current account deficit is now much harder on the import side. Farmers are in many cases heavily indebted from previous poor years and face higher interest rates and overall cost increases as oil price hikes permeate the economy.

There could be reduced demand for exports as trading partner economies tighten their belts over more expensive fuel imports and a strong US dollar. Japan may intervene to keep its exchange rate at about 105 yen to the greenback, which would keep the US currency strong.

Main indices around the world are cooling off. The Dow Jones industrial average is flattening off at 11,250 but is still up 750 points from the beginning of August. The fuel-price sensitive Dow Jones transportation index is capped at about 2900. The NZSE had better get its merger with the ASX under way while it still lists some biggish outfits. Its trading turnover is under threat. Softness is evident in top local large caps Telecom and Carter Holt Harvey. The NZSE smaller companies capital index is bucking the trend.

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