After rallying strongly since March, global equity markets are now well into the correction phase. It is now becoming clear that the credit crunch, along with record high energy prices, are beginning to put a dent in global economic growth prospects.

In Australia, high interest rates are combining with record petrol prices to knock the previously indefatigable consumer for six. Retail sales figures for April actually fell 0.2%. In an inflationary environment, notching up a monthly nominal decline represents a pretty poor outcome. No wonder retail stocks sold off on the news.

Those hoping that the weak economic numbers might lead to lower interest rates in the months ahead might be disappointed. While the RBA announced today that rates are on hold, Governor Glenn Stevens remains concerned that a strong terms of trade could continue to have an effect on domestic demand and inflation.

Our interpretation is that rates are on hold for now, but the RBA retains a ‘tightening bias’. So no interest rate cuts on the horizon. Rising unemployment would change this outlook but by all accounts the labour market remains extremely tight.

While the Aussie market remains quiet over the next few weeks in relation to earnings announcements, in the lead up to financial year end we are likely to see an increase in earnings downgrades. The market has to some extent already discounted a weaker earnings environment. Domestically exposed stocks are well off last year’s highs and the strength of the Aussie market has been nearly exclusively resource related.

We look at some of the sectors in this week’s market comment. We also ask whether the credit crisis is over. Overnight news from the US suggests the jury is still out on that question, with Standard and Poor’s lowering the credit rating of three of Wall Street’s largest investment banks. As we point out, the credit crisis is now affecting economic activity and there is a risk that a new round of defaults could cause further credit market ructions.

We understand that Indophil has been vigorously encouraging Lion Selection shareholders to accept its bid, which closes on 12 June. Before reading tonight’s report on the matter, we suggest interested readers have a very strong coffee. This is one of the more confusing and complex takeovers we have seen.

In other news, we provide an update on our exposure to the global agricultural boom and also look at the latest results from Tower Australia. While broadly negative on the financials, long term holding Tower has performed well of late and its operating environment continues to look attractive.

It was a quiet week on the news front so only Oxiana gets a mention in portfolio news.

We hope you enjoy this week’s report.