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  • Finance reports talk about the state of the economy and what is going on in the financial world here at home and overseas. (Getty)Source: Getty
The ASX, Gold, Crude Oil, shares and the Aussie dollar. We hear the finance report on the news every day. It may sound alien or foreign, and you might feel it has nothing to do with you. Do you know what it means?
By
Frank Mathisen / SBS Norwegian

23 Sep 2015 - 9:56 AM  UPDATED 16 Mar 2016 - 2:07 PM

In many news bulletins there is a finance section, or a finance report. It talks about the state of the economy and what is going on in the financial world here at home and overseas.

SBS TV's former finance reporter Wolfgang Muller explains why it is important to pay attention to the economy.

"Well the financial world, the economy is an important part of our life. It's where we earn our money, the money we need to buy our groceries, the money we need for the rent and to pay the mortgage. So it is a very important part and we have to pay attention to what's happening there otherwise we might run out of opportunities to earn our money."

He lays out what you can normally expect to hear in a finance report.

"Well surely the stock market which is, you might say 'well I don't own any shares so why should I pay any attention to it?' All our superannuation earnings are tied to the stock market that's where most of the money is invested. Interest rates are very important we pay mortgages; we pay all sorts of things so it is important to see where the interest rates go. And sometimes we hear about how some companies are doing, and some of them are very big companies, and some of them come to grief and disappear and people lose their jobs so that can be very hurtful not to know what is going on in the economy."

Deloitte Access Economics' Chris Richardson says the sharemarket may be a bit over reported for the average man, but also explains that it is very significant for our savings.

The sharemarket is an important part of the finance reports and it normally always comes first. Professor Adam Clements from QUT's Business School describes the purpose of the sharemarket.

"The sharemarket represents one of the major sources of funds that companies raise to operate their businesses on a day-to-day basis to make investments and build new factories and things like this. This then represents a major source of savings for lots of individuals, lots of households so we as individuals could buy shares in companies and then the companies would go and use that money to run their businesses and grow their businesses."

Although we hear about the daily changes in the sharemarket, we might not make savings and investment decisions on a daily basis.

Deloitte Access Economics' Chris Richardson says the sharemarket may be a bit over reported for the average man, but also explains that it is very significant for our savings.

"First up it is worth noting that although the sharemarket is important we probably report it to much. To the average person in Australia things like jobs wages interest rates those things tend to be a bit more important. But share markets are important you know the average Australian holds their wealth two ways, one in their houses about two thirds of the wealth of the average Australian is in housing. Much of the rest is in share markets and even if you don't think you are in share markets chances are that you are remember superannuation, compulsory for workers effectively a bunch of that money end up in share markets."

The sharemarket is a market place where you can buy and sell shares in a company.  It's the sum of all companies listed.  The direction of the sharemarket's value, moving up or down, is often seen as a major indicator of the health of the economy. When shares go up it shows that investors, those who buy shares, are positive to owning shares in companies instead of putting the money in the bank or other investments. When more people want buy shares than the people who want to sell - the price goes up, and vice versa.

A share market index is a sum of a collection of shares that are representative for that particular market. The main index in Australia is the ASX 200, made up of the largest 200 companies listed on the Australian Stock Exchange.

A share market index is a sum of a collection of shares that are representative for that particular market.

Chris Richardson explains the other international indexes we are updated on.

"Dow Jones for example is the New York stock exchange. Why do we take note of that? Because US financial markets absolutely dominate the world. US economy no longer dominates the way it used to, but certainly in financial markets the US is the 400 pound gorilla. Typically what the US share markets, you know the Dow Jones and some of the others, the Nasdaq, have done overnight provide a lead, they will tell you if the Australian share market is going to go up or down."

 

The exchange rate is how many Australian dollars it is going to cost us to buy one overseas currency, and  how many Australian dollars we will receive if we sell one unit of an overseas currency.

 

Another influence from overseas is the exchange rate. The exchange rate is how many Australian dollars it is going to cost us to buy one overseas currency, and  how many Australian dollars we will receive if we sell one unit of an overseas currency. A strong Australian dollar means we can buy more of an overseas currency, which is positive when we are travelling overseas or are buying imported goods.  But if we are competing with imported goods or selling our products on overseas markets we get more competitive if the Australian dollar is low.

Chris Richardson describes how the exchange rate reacts.

"It is important it tends to be not important in a way most people think of it. Some people, some politicians think of the exchange rate as some great barometer of the strength of the country and how wonderful it is if your exchange rate is very strong. And certainly if you travel overseas or are buying stuff that is imported a high, a strong exchange rate is a good thing. More important though is that the exchange rate is going up and down with the economy you want it to be this giant bumper bar on the Australian economy when our is going well other things equal you are going to expect, almost downright hope that our currency is high. When we are in trouble though you want the dollar to go down, what it does is that it makes Australian businesses more competitive."

Australia is trading and doing business with many countries around the world so our dollar will be exchanged with many other currencies, but when you listen to the finance report in the news you will mostly hear about the exchange rate in US dollars.

This is because the US dollar is the single most important currency in the world.

Professor Adam Clements explains.

"The US dollar is the major global currency so that's an industry standard. Historically speaking the US dollar has been the benchmark for a lot of global trade and hence the value of the Australian dollar relative to the US dollar is one of the most important exchange rates covered."

Another important figure covered in the finance report is interest rates, most notably the Reserve Bank's official cash rate.

Professor Clements says a change in interest rates affects our behaviours and conversely the whole economy.

"The level of the interest that the reserve bank is controlling influences the cost of borrowing for you or I or for businesses so we tend to find that mortgage interest rates move quite closely with movements in the reserve bank interest rates. Say if the Reserve Bank is worried about the economy not performing particularly well and the reserve bank wants to stimulate spending in the economy, the Reserve Bank will think about cutting interest rates to make them lower, which means that you and I as individuals that have mortgages now have more money to spend after we pay our mortgages so they can control the level of spending in the economy by changing the amount we need to pay on our mortgages."

It's not just our personal finances and behaviours that interest rates impact.

Professor Clements says the official rate has a knock-on effect on business and the wider sharemarket.

"That also influences the cost of borrowing for companies all around the  country so that if cost of borrowing of goes up for instances that is going to reduce the profit that companies earn and that will have a flow on effect to the level of the share market because company profits will fall. So those interest rates are one of the major in some sense levers of economic policy that allow the Reserve Bank to control the level of spending and general activity in the economy."

'A bullish or bearish market, investor confidence and fears.'  These are what are known as investor sentiments.

'A bullish or bearish market, investor confidence and fears.'  These are what are known as investor sentiments.  If the returns on interest bearing investments are going down, then investors will be looking for alternative investments which often in the sharemarket.

Recently, finance markets have focused on the fall in commodities prices. Chris Richardson describes why commodities prices may affect the average person.

"The price of a bunch of things we usually call them commodities, it might be oil prices, it might be coal or iron ore prices, these are important for Australia. We are an unusual rich nation, most rich nation don't mine stuff and sell it to the world, we do. So what happens to the iron ore price, what happens to the coal price you know these are our two largest exports, that's extremely important for Australia and it gives you a signal about the change in income in Australia. When those sorts of prices are rising you are getting great income growth and when they are falling it tends to go the other way."

Financial analysts often follow the price of oil and gas.

Chris Richardson says while a lower oil price does mean lower petrol prices, oil and gas has a more complex impact.

"We are only a couple of years away from becoming the world's largest exporter of gas. And gas and oil you know, because they are doing similar things you are using them as fossil fuel basically those prices tend to move together so when the average person hear about the oil price falling and they are cheering you know that is because they can fill up their car more cheaply, very true. These days though you'd be starting that is not such a good news for Australia if we're about to be the world largest exporter of gas a lower oil price is going to mean a lower gas price and that is going to hit Australia's earnings."    

The oil price is often reported as the price of West Texas Intermediate, which is one of a number of oil prices around the world.

World Texas Intermediate is based upon the oil price in the US.  The other major oil indexes around the world are 'Brent Blend' - mostly used in Europe and the 'OPEC basket' and 'Dubai Crude' used around the Persian Gulf. Asia and Australia often report the Tapis oil price, a Singapore based index for imported oil from Malaysia.

What about gold? Although important, Chris Richardson says it's over-reported.

"But we do tend to report it more often than it truly deserves I just don't think it as important in modern economies and even for Australia as an important gold miner and exporter I really don't think it deserves that attention."

Adam Clements says we still tend to see gold as a safe haven when the financial markets are in turmoil.

"We tend to still believe that gold is somewhat of a safe haven, in the sense that during times of economic turmoil and falling share prices gold has tended to be a sort of a safe haven for investors to shift their money into. So we tend to find a somewhat of a countercyclical behaviour with the gold price relative to broad share market movements."