Economic And Market Summary

The general improvement in world economic conditions continued in January with the IMF revising its forecast for economic growth in 2010 from 3.1% to 3.9%, followed by further growth of 4.3% in 2011. January saw a lift in US economic growth, but this was due mostly to a turn in the inventory cycle, and as yet, better growth has not translated into increased employment. In Australia, the RBA Board did not meet in January.

Despite further signs that the global recovery was consolidating, financial markets assumed a less optimistic tone as they seemed to recognise that the global economy has some way to go to work through the legacy of the GFC. Investor sentiment was weighed down by concerns about the high level of sovereign debt of some smaller European countries, uncertainty about the future path of bank regulation and the possible slowing of China’s growth as a result of the central bank’s tightening of monetary policy.

Reflecting the decline in investor sentiment, the MSCI global share price index dropped 3.8% in January and ended the month at its lowest level since November 2009, after peaking in mid-January. Emerging markets led the fall with a drop of 4.5%, wiping out some of the sizeable gains made in late-2009. The S&P500 closed the month on 1073, a fall of 3.7% and the ASX200 posted its biggest monthly fall in 15 months (down 6.2%).

Bond markets saw prices rally (i.e. interest rates fell) and, despite positive economic growth data, ended January with US 10-year bond yields down 25 basis points to 3.58%. US markets displayed nervousness about the sustainability of economic growth and the risks posed by the sovereign debt levels of some small European countries. Domestically, Australian 10-year bond yields fell and closed the month at 5.38% as offshore influences set the tone. In corporate bond markets, riskier issuers saw larger falls in premiums than highly rated issuers and spreads decreased during January amid signs the US economy is beginning to strengthen.

The CRB index of global commodity prices fell 1.3%, after peaking at a 16-month high in early January. Base metals saw sizeable declines in prices amid fears of the impact of Chinese stockpiling on future demand and the expected growth slowdown brought on by the central bank’s monetary policy tightening – prices for zinc, lead, aluminium and copper fell 17.2%, 16.7%, 8.4% and 6.9% respectively. Oil prices were down 8.2%.

The US dollar appreciated against most major currencies (except the yen) as the appetite for riskier or higher yielding assets faded, the outlook for the US economy firmed and the European markets were plagued by sovereign debt fears. The Australian dollar depreciated by 0.7% against a strengthening US dollar over the month. 

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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