The much awaited details of the carbon tax were announced on July 10, and the week that followed was a choppy one. We take a look at how the market fared following this important economic announcement and how the carbon tax may affect future trade.
Overview
Carbon emissions will be taxed at $23 a tonne from July 1, 2012 and will be paid by Australia’s top 500 polluters, with the price increasing 2.5% per year until the introduction of the replacement emissions trading scheme on July 1, 2015.
Households
The public pocket will be affected, with average household costs to rise by an anticipated $9.90 per week. Reimbursement, however, will be received in the form of a $10.10 average weekly increase in payments to households via the clean energy supplement.
Industries
$9.2 billion will be allocated to industry over the first three years with the most exposed industries receiving free permits representing 94.5% of industry average carbon costs. The steel industry will get $300 million as an incentive to move towards cleaner energy, and $1.3 billion has been set aside for a Coal Sector Jobs Package. Agriculture will not be subjected to the carbon tax directly, however from 2014 onward the tax will be broadened to include commercial-use fuel for heavy transport.
$3.2 billion has been reserved for the Australian Renewable Energy Agency and a $10 billion Clean Energy Finance Corporation will be established to invest in new technology. 2000 megawatts of the dirtiest power generators will be closed by 2020, with the Climate Change Authority to adivse on pollution caps.
The Australian market’s immediate reaction
Unsurprisingly the biggest falls were seen in those industries directly exposed to the carbon tax. On July 11 the S&P/ASX 200 fell 72.4 points (1.56%) to close at 4582.3, with the soft US unemployment figures and China’s higher-than-expected inflation data also affecting the index.
The energy sector was the hardest hit, shedding 2%. Airlines also suffered. July 12 saw broad-based losses, with only 11 companies on the ASX 200 making gains. The most notable declines were seen across energy, banking, airlines and retail.
In the wake of rising European debt concerns, the Australian market’s descent was also lower than that of Europe, despite Greece deflecting default.
Predicted long-term impact
The uncertainty surrounding the carbon tax resulted in a more bearish market, with the Westpac-Melbourne Institute Index of Consumer Sentiment dropping 8.3% from June to July; this was the biggest single-month drop since October 2008 when Lehman Brothers collapsed. In the long-term, the carbon tax may only have a minor affect on businesses and the economy. However, many also believe that in response to the price rises, the RBA will raise interest rates. If this occurs, it could create a challenging environment for retailers as consumers watch their spending.
It should also be noted that the Treasury’s forecast of the economy growing by 1.1% per annum from now to 2050 with the carbon tax (as opposed to 1.2% per year without it) may not be sustainable.
Trading around economic announcements
Many market participants trade around economic announcements. Let’s take a look at Rio Tinto, a stock that was closely watched during the release of the carbon tax scheme.
Once establishing the current range the stock is trading in, we can see that Rio Tinto’s share price has been moving sideways between $77 and $89 since September 2010.
Rio Tinto closing share price – 20/07/2010 – 20/07/2011
An upward trend can be seen in the weeks before the carbon tax announcement. On June 20, Rio hit a low of 77.3 to finish the month at 82.99.
Rio Tinto closing share price – 30/06/2011 – 30/07/2011
Stops and Limits
Rio Tinto’s share price fell sharply, hitting $83.20 on July 11 (a loss of 1.36%), and a further 2.13% on July 12, bringing it to $81.43. In instances of market volatility such as that seen here, a Stop order may have been triggered to sell Rio Tinto. IG Markets offers a wide array of risk protection including Guaranteed Stops and Limit orders to compliment your trading. To see how these can help your strategies, view our examples
Have an opinion on the markets? Why not take a CFD position?
Do you have a view about the trend of the Australia 200, or stocks that may be affected by the current economic and political climate? We offer a vast range of global index CFDs from just 1 point. You can also go long or short on over 700 Australian share CFDs at highly competitive rates.
If you are a keen watcher of market trends, don’t miss our daily Trader Radar, part of our extensive market analysis, which lists stocks that traders have their eye on. We also provide weekly Economic Indicators and a breakdown of important releases in The Week Ahead.
If you don’t already have an IG Markets account, simply apply online and you can begin trading in minutes!
Updated: 22/07/2011
Disclaimer: IG Markets provides an execution-only service. The material above does not contain (and should not be construed as containing) personal financial or investment advice or other recommendations, or an offer of, or solicitation for, a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of the above information. Consequently any person acting on it does so entirely at his or her own risk. The research does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. IG Markets accepts no responsibility for any use that may be made of these comments and for any consequences that result.