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Overseas gloom starting to lift

Countryman

The first quarter of 2012 concluded positively for the Australian share market, aided by strong overseas leads and options expiry locally.

With the Eurozone announcing over the weekend that an additional � billion ($A384.8 billion) had been added to its bailout fund, this week we may finally see the Australian share market break out to the upside.

The Reserve Bank of Australia's (RBA) interest rate announcement on Tuesday could also positively surprise, although most economists are expecting them to stay put for the time being.

It is worth noting that BHP makes up a major percentage of the index - so for the market to break out and hold above the key 4400 level, one would feel that BHP's share price would have to strongly improve from the support level of $34.

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This may be challenging given the continued musings that the Chinese economy is slowing and the flow-on effect this is having on commodity stocks.

Another concern is a report by The Australian this week that falling US natural gas prices may mean that BHP will have to write off as much as $US9 billion ($A8.6 billion) from the value of the its US shale gas assets, which it paid $US20.1 billion for last year.

Natural gas prices in the US have hit 10-year lows due to a surge in domestic supplies and this is why shale 'oil' is the name of the game in the US and not shale 'gas'.

To put this into perspective, BHP's Australian Market Cap is about US$115 billion ($A111 billion).

On the interest rate front, there has been a lot of discussion lately about how reliant our local banks are on overseas funding as a source for their lending at home.

The cost of borrowing from overseas has increased sharply, thereby making it hard for our banks to pass on RBA interest rate cuts.

This week PIMCO's (a major US hedge fund) Peter Dorian gave a simple explanation for why Australian banks faced higher borrowing costs even though our economy was rated among the best in the world.

He explained that overseas lenders studied the Australian housing market and felt there was risk to a bubble-like collapse.

Australians may believe there is little chance of this occurring, but the people who fund the banks feel that due to the high price of our houses in comparison to the rest of the world and the exposure our four major banks have to this, that they face extra risk.

That danger is priced into higher interest rates the lenders demand from our banks.

These are the swings and roundabouts of international money flows.

Finally, I am back on the Terrace and behind the screen this week after enjoying the fresh air and accommodating people across the State, from Moonyoonooka to Cascade.

It is amazing how much you can learn in a short period of time from 'face to face' conversations with friendly people who are willing to share years of experience and knowledge.

A big thank you to everyone I met and spoke to and a special mention to Bob Pearce, from Oil Tech, who drew the short straw and got the backseat with me from Brookton to Esperance and then back on the plane.

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_Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time. _

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