After a very strong week last week, the US markets couldn't hold the momentum overnight, with all three indices showing significant losses.
The Dow Jones Industrial Average closed down 0.1% to 13,213.6 points, while the S&P 500 lost 0.4% to 1,397.9 and the Nasdaq dropped 0.7% to finish the US trading day at 3,046.4 points.
The headline news out of the US overnight was a US$300m investment by Microsoft (Nasdaq: MSFT) in struggling book retailer Barnes & Noble (NYSE: BKS). To be more precise, the investment was in a new subsidiary of Barnes & Noble which will house its Nook eReader – a competitor to Amazon's (Nasdaq: AMZN) Kindle and the iBooks – iPhone/iPad combination from Apple (Nasdaq: AAPL).
Unsurprisingly, Barnes & Noble shares jumped 52% on the day in wake of the news.
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In other international news, Spain is now technically in recession after its second consecutive quarter of GDP contraction, but with Spanish unemployment at 24.4%, the official designation of recession is clearly not required.
The ASX SPI futures index responded to the US lead, down 11 points or 0.2% this morning to 4,386 points, suggesting a negative start for the S&P / ASX 200 (Index: ^AXJO) (ASX: XJO) and All Ordinaries (Index: ^AORD) (ASX: XAO) when trading commences this morning.
In case you'd missed it (and unless you've been living in a cave, it's been hard to avoid) the Reserve Bank of Australia will make its decision on whether to hold or move interest rates today.
A not-too-subtle hint from the RBA last month, combined with soft inflation and housing starts data means analysts have given up debating whether the RBA will move and have turned their attention to by how much it will drop interest rates. The consensus is still for a 25 basis point (0.25 percentage point) drop, but a sizeable minority of analysts are suggesting the RBA will drop by 50.
In something of a surprise, former RBA governor Bernie Stevens waded into the debate on the ABC's 730 program last night, calling for a 50 basis point cut on the basis that a 25 basis point cut is already expected, so 50 is required to really 'kick start' the economy.
The RBA decision will be keenly watched by anyone with a mortgage, but also companies exposed to discretionary consumer spending or the Australian dollar.
Retailers will be at the head of that queue, particularly the likes of David Jones (ASX: DJS), Myer (ASX: MYR), Specialty Fashion (ASX: SFH), Harvey Norman (ASX: HVN), Billabong (ASX: BBG) and JB Hi-Fi (ASX: JBH). These companies will be hoping a rate cut with give consumers the confidence they need to start spending again.
Any rate cut is likely to put downward pressure on the Australian dollar, as the interest rate differential between here and other countries is reduced. A lower Aussie is good news for exporters, as it makes their products less expensive overseas, and good news for local manufacturers as it pushes up the prices of locally made products. It also pushes up the reported profits of companies making their money overseas.
Beneficiaries from a lower Australian dollar would include Westfield Group (ASX: WDC), Cochlear (ASX: COH), CSL Limited (ASX: CSL) as well as the perennially struggling OneSteel (ASX: OST) and BlueScope (ASX: BSL) – though the latter two have broader structural problems that won't be fixed just from a slightly lower dollar.
Conversely, companies such as Flight Centre (ASX: FLT) may be adversely impacted if outbound travel slows, and companies with large imported cost bases will also see input costs rise. Telstra (ASX: TLS), ARB Corporation (ASX: ARP) and Qantas (ASX: QAN) are likely to see their costs rise.
With so much of our food imported, expect to see a weaker Australian dollar push packaged food prices up – though Woolworths (ASX: WOW) and Wesfarmers (ASX: WES) Coles business will do everything they can to make sure suppliers absorb as much of the increase as possible.
Of course, many companies may have hedged their short- and medium-term currency needs, so the impact may not be felt for a while.
If you have a mortgage, I hope the RBA has some good news for you this afternoon. If you're living off your investments, it might be time to think about higher yielding shares (which can also carry the benefit of franking credits).
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Scott Phillips is an investment analyst with The Motley Fool. You can follow him on Twitter@TMFGilla. Take Stock is The Motley Fool Australia's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691).