Shares fall as credit crunch hits home

IT`S shaping up to be another tough week for investors, with choppy conditions continuing on the share market and home loan rate hikes coming into effect.

The share market remained in the red at noon today,  after Wall St took a hammering on Friday amid fears about the health of two huge US home loan firms. There are concerns about the stability of mortgage firms Freddie Mac and Fannie Mae, which together own or guarantee around 40 per cent of American home loans.

Meanwhile, some Australian borrowers face higher home loan rates after hikes announced Friday by the Commonwealth Bank and ANZ come into effect today. CBA has hiked its home loan rates by 14 basis points, pushing up its standard variable rate home loan from 9.44 per cent per annum to 9.58 per cent per annum and its basic variable home loan will go from 8.93 per cent to 9.07 per cent. This means payments on a $300,000 mortgage taken out over 30 years will rise by about $7 a week. 

ANZ has hiked its standard variable rate by 15 basis points to 9.62 per cent, effective today. St George has also raised its home loan rates, St George, lifting its standard variable interest rate by 20 basis points to 9.67 per cent. Other big banks are expected to follow suit.

Share bears are prowling

Australian investors are being affected by the same credit crunch jitters that drove the bluechip Dow Jones Industrial Average down 1.14 per cent on Friday.

At 12noon (AEST) the benchmark S&P/ASX200 index was down 7.7 points, or 0.15 per cent, to 4972.2. The index earlier declined to 4936.4. The broader All Ordinaries lost 14.7 points to 5053.1.

Both New York and European stocks closed sharply lower on Friday after shares of Fannie Mae and Freddie Mac sank, as investors considered whether the US government would need to provide support.

"US equity markets finished weaker once again. Fannie Mae and Freddie Mac were down 49 per cent and 51 per cent, respectively in early trade,`` ANZ market strategist Patricia Gacis said.

"However, the stocks bounced off their lows after Citigroup rated them as a "buy``.``

Treasury Secretary Henry Paulson said the Government was planning to expand its current line of credit to the two companies should they need to tap it.

The Dow Jones Industrial Average fell 128.48 points, or 1.14 per cent, to close at 11,100.54 and the Standard & Poor`s 500 index declined 13.90 points, 1.11 per cent, to a close of 1239.49.

Rough outlook

AMP Capital`s chief economist Shane Oliver says that while local shares are already extremely oversold and due for a bounce, the next few months are likely to remain "very rough``.

Dr Oliver pointed to the high oil price, slowing growth "virtually everywhere``, inflation worries and the ongoing credit crunch as "big short-term headwinds for shares``.

"Furthermore, the period out to September/October is often rough for shares and the break in major share markets below their March lows, particularly for the key direction setting US share market, suggests that there will be further falls in the months ahead,`` he said.

"As such, it remains a time for investor caution and this is likely to be the case for the next three months or so.``

Even so, Dr Oliver is forecasting a sharp rally ahead of Christmas as the oil price falls back to a level more in line with supply and demand fundamentals and the economic outlook starts to improve.

Investors will be encouraged to take advantage of attractive share valuations, with forward price to earnings ratios now around 11 times, well below a longer-term average of 15 times.

"So, for those prepared to look through all the short-term turbulence and prognostications of doom, current share market levels offer great long-term opportunities for investors,`` he said.

Dr Oliver singled out property trusts as good value on a 12-month view even though they remain high risk in the short term.

Local investors will get a steady news flow through the week to help assess the state of economy, beginning with lending finance figures for May released today.

The same day, Wesfarmers boss Richard Goyder is due to share his thoughts on the retail-and-resource giant`s prospects as it continues with its overhaul of the Coles empire.

Minutes from the Reserve Bank of Australia`s (RBA`s) July meeting being released tomorrow will give further detail on how successful monetary policy has been in slowing demand.

Governor Glenn Stevens` speech in Sydney the following day will be scoured for further clues on the inflation scenario.

The health of Australia`s resources sector can be gauged with Rio Tinto`s quarterly production report on Wednesday and one from Woodside on Thursday. 

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