Economic And Market Summary

Concerns about European governments’ debt problems dominated global financial markets in May, overshadowing more positive economic news about the global economic recovery.  Progress on legislating changes to strengthen US financial market regulation – potentially reducing banks’ profits – also prompted selling of stocks and renewed demand for ‘safe haven’ assets during May.

Markets were sceptical about the ability of the measures to address Europe’s underlying fiscal problems, despite the announcement of three International Monetary Fund/European Union bailout packages, each larger than the previous one, and intervention by the European Central Bank to stabilise prices of European sovereign bonds.

Meanwhile, the Organisation for Economic Co-operation and Development (OECD) released new forecasts during May, revising up the 2010 growth outlook for most nations.  However, most forecasters now expect global growth in 2011 to be below that in 2010 as government stimulus effects dissipate.  The OECD, the IMF and the G20 are now all urging fiscal consolidation and the start to monetary tightening in most major economies. 

Citing concerns about sovereign creditworthiness and the repercussions for financial markets, the Reserve Bank of Australia (RBA) paused in its recent round of rate hikes, leaving the cash rate at 4.5% in early June.  At the height of the financial instability in late May, money markets had almost fully priced in a 25 basis point cut in the official interest rate by September.  However, the RBA noted that while developments in the global economy will need to be monitored, Australian economic growth will remain close to trend and inflation is likely to push the upper bound of the target range.

Global stock markets fell substantially, but it was difficult to discern the main causes.  The MSCI world share price index fell 7.6% in May and emerging stock markets fell 5.6%. The US S&P500 fell 8.2%, ostensibly due to concerns about European sovereign debt and the passing of tougher financial regulation that would reduce banks profits.  While the US stock market fell sharply, the German stock market fell just 2.8%.  On May 6, the Dow Jones industrial average fell 1,000 points in a matter of minutes and then staged an almost complete rebound for reasons that US regulators are still trying to determine.  Meanwhile, the ASX200 fell 7.9% in May, with the Resources sector performing better than other sectors despite the heated debate about the Resources Super Profits Tax (RSPT). 

In this environment of heightened risk aversion, demand for low-risk government bonds increased and credit spreads widened.  The yield on 10-year US Government bonds fell 37 basis points (bps) to 3.28%, although the yield on BAA-rated US corporate bonds rose 13 bps to 6.20%.

The Commodity Research Bureau (CRB) index of world commodity prices fell by 4.5% in May, with the gold price (+3.3%) benefitting from investment flows to safe havens.  Base metals prices fell by 10% or more.  Higher spot and contract prices for iron ore and coal supported the RBA’s Australian commodity price index.

The Australian dollar depreciated 9.2% against the US dollar, finishing May at US84c.  The Yen was the strongest of the major currencies, gaining 3.2% against the US dollar and 10.6% against the Euro.

Source: Access Capital Advisers Pty. Ltd

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

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