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Weekly commentary

ECONOMY: Australian annual inflation rate has risen to 3.2%, a four year high on the back of a rise in oil prices and surge in pre-GST housing activity. Inflation is now above the RBA’s target range of 2.0% to 3.0%. The RBA is not expected at this stage to lift interest rates to counter the rise in inflation. However, the rise in average weekly earnings of 4.5% over the past 12 months is a concern.

Equities: Even though US company earnings for the second quarter were strong, the market is now forecasting on a slowdown in the growth forecast earnings for the third and fourth quarters, which is expected to place some downward pressure on US equities. Australian market has paused over the past week after reaching a record high of 3,291 points on 21 July.

Resource stocks over the past week have been the highlight, on the expectation that commodity prices will rise & possibility of further corporate rationalisation. One stock under that scrutiny is NBH, which continues to trade higher, as the market awaits the next move from RIO. A lower A$ & fresh news from the Diggers & Dealers re-inforces these rationalisation claims, as Anglo Gold stated they are on the acquisition trail for low cost Gold producers. Another influencing factor over the resource sector, is the release of quarterly results. BHP & MIM have so far surprised the market with stronger performances, while RIO report on Thursday with an expected 40% increase on the previous corresponding period.

Industrial stocks have been weaker on concerns earnings growth will be hampered by the prospect of higher global interest rates. These fears are reflected in the world’s two biggest equity markets- America & Japan, which have been hit in the past week by the near certainty interest rates will rise & further squeeze profitability. News Corp contributed to the majority of the index fall, as speculation mounted they would report a 20% decline ontheir net profit. Qantas was one stock that was in favour, as speculation mounted they are looking at a possible stake in Malaysia Airlines & the delayed launch of competitor Virgin airlines. Keycorp also had a stronger week after Telstra announced they would take a 51% stake in the company.

The Small Industrial market experienced conditions, which indicate sentiment towards the small end of the market continues to improve, despite the index closing marginally down. The Small Industrials Index experienced a degree of volatility testing recent highs of 2281 before ending at 2245.9 down 4 points, but more significantly the gain since June 30 now stands at 5.5%.

Retail investors continue to be active. They were again responsible for volatility during the week in stocks such as BMC, SAS and SOH. Professional investors are also showing renewed interest in the small industrial stocks. In particular IPO activity is once again accelerating. Some profit taking was evident during the week reflecting the low level of new company news, as is typical ahead of the reporting period.

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