Economic And Market Summary

Financial market sentiment improved in July, with the return of appetite for risk driving equity markets higher during the month. Fears of contagion from the Eurozone’s fiscal crisis subsided which helped to lift market sentiment. Markets were also buoyed by the better than expected earnings results in the US and positive sentiment surrounding the results of stress tests conducted on European banks.  

Now that policymakers are making plans to withdraw fiscal support, as endorsed at the recent G-20 meeting, the weakness of global demand has come back into focus. Macro-economic data released in July suggested that the US economy is slowing as the boost from the rebuilding of inventories and policy stimulus fades. While some commentators believe a double-dip recession is likely, the data suggests only a slower rate of economic growth. US GDP growth in the June quarter slowed to an annualised 2.4% pace, a relatively lacklustre recovery given the worst downturn in activity since World War II.  Economic growth in China has also slowed in recent months as authorities have introduced measures to reduce inflationary pressures and address a property bubble. 

In Australia, one of the key downside risks for Australia continues to be the potential for China to slow more than is currently expected. Despite the labour market continuing to strengthen and the unemployment rate falling to 5.1%, the Reserve Bank of Australia left interest rates unchanged in July at 4.5%. While the Australian economy has performed well over recent quarters, there are indications it is beginning to slow. The slowing is particularly evident in the housing sector.  For example, private sector housing approvals have fallen since late 2009.  More recently, forward orders from the NAB Business Survey have fallen sharply, suggesting a material moderation in GDP growth. 

After falling materially since late April 2010, global equity markets increased sharply in July, reflecting a very favourable US earnings season for the June quarter. In particular, there was significant improvement in the corporate sector’s finances which have swung from deficit to surplus as profits have recovered. In the US, markets took heart from the gap between internally generated funds and investment spending which is at its widest for 50 years, indicating that firms are in a strong position to begin spending again. The MSCI global stock price index rose 8.0% (in US dollar terms) in the month, with emerging markets rising 8.3%. Emerging European markets were the best performers over the period, as they reacted positively to signs of diminishing Eurozone tensions. 

In Australia, the S&P/ASX 200 Index finished the month up 4.5% in July. The pro cyclical sentiment in the market during the month of July was reflected in the strong rebound in the Financials, Industrials, Materials and Resource sectors, while defensive sectors tended to underperform (for example, Telecom and Consumer Staples). Resource sector sentiment also improved after the new Prime Minister announced a revised resource tax which received general approval from the mining industry.

Sovereign bonds of the major developed economies have rallied (that is, prices have risen and yields have fallen) significantly over the last few months. Reflecting soft US macro-economic data, US 10 year bonds have rallied very significantly. While Australian bonds have also rallied over the last few months, the US bond market has significantly outperformed Australia’s.  From recent highs of around 4%, the US 10 year bond yield ended July at around 3%. The underperformance of Australian bonds versus US bonds reflects the more favourable growth outlook for the Australian economy, although this has moderated somewhat in recent months.

The return of appetite for risk saw the Australian dollar rally strongly against the US dollar over the course of July, ending the month at US90.4 cents. The Australian dollar is now around 25% above its post-float average, and is only moderately below its pre-Global Financial Crisis peak of around US98 cents. With the return of risk appetite in July, the Australian dollar found strong support on the back of demand for commodity based currencies and weakness in US economic data. 

Source: Access Capital Advisers Pty Ltd.

This article provides general information only and may not be relied on as legal or financial advice.

Prime Super is a Regulated Superannuation Fund issued by Prime Super Pty Ltd ABN 81 067 241 016, AFSL 219723. A Product Disclosure Statement can be obtained from the issuer and should be considered before deciding whether to acquire, hold or dispose of an interest in the Fund.