Economic And Market Summary

The broad improvement in overseas and domestic economic indicators was maintained through October. However, the IMF remains cautious about global growth prospects – economic growth remains dependent upon government support and hasty withdrawal of this support may significantly dampen the global recovery.

In Australia, the Government’s latest round of forecasts predicts stronger growth and smaller deficits than those presented in the Budget. The Reserve Bank of Australia (RBA) anticipates growth close to the long-term trend and inflation close to their 2% to 3% target range over the next year. Consequently, the official cash rate, which is well below average - was again raised by 25bps to 3.25% in October. The latest data releases were mixed, although Australia’s outlook remains positive. Consumer sentiment has risen sharply to lie above pre-crisis levels and residential housing approvals have increased.

Conditions in financial markets were mixed in October, with more volatility than has been seen in recent months. Share markets and bond yields reached new peaks for this cycle, but then fell in the latter part of the month. Global stock markets lost ground in October after posting solid gains in July, August and September. The MSCI World share price index fell by 2.1% reflecting falls in all the major markets – the US and UK fell 2%, Germany dropped 5% and Japan lost 1%. In Australia, early gains gave way to losses. The S&P200 price index was up 6% at one stage but ended October 2.1% lower, with banking and mining stocks underperforming more defensive sectors such as healthcare and consumer staples. 

The RBA’s actions help push up the Australian 10-year bond yield further, increasing the yield spread over US 10-year bonds to 220 basis points. In corporate bond markets, credit risk premiums continued to fall, with riskier issuers improving the most.

Credit growth remained weak, albeit partly due to improved conditions in capital markets for borrowers. It remains clear that small and medium-size businesses are still experiencing difficulties in obtaining credit, as shown by the RBA Governor and Treasurer calling for banks to do more for commercial borrowers. 

The Commodity Resource Bureau (CRB) index of world commodity prices rose 4.5% in October, as commodity markets proved to be more resilient than other markets. The oil price fluctuated between US$75/bbl and US$85/bbl, compared to a $65-$75/bbl range in the September quarter. The gold price increased by a further 4.2%, peaking just under US$1100/oz. Base metals were well supported – led by copper (+5%) and zinc (+10%) – despite signs of Chinese demand easing. 

The downtrend in the US dollar continued in October, taking the cumulative decline since March 2009 to around 10%. By contrast, the Australian dollar gained another 3.7% in October on a trade-weighted basis – a cumulative appreciation of 30% since March 2009. The Australian dollar reached US$0.91, the highest level since July 2008.

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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