Economic And Market Summary

Markets performed strongly in July as ongoing improvements in a number of global economic indicators underpinned rising investor confidence.  While recent information suggests that the global economy is still contracting, the rate of contraction has moderated considerably, with leading indicators consistent with a return to growth before the end of 2009. Importantly, the rate of improvement has been faster than the consensus expected. The Australian economy also appears to have improved meaningfully over recent months. As risk aversion measures across both equity and credit markets continued to decline, investor focus shifted to countries and sectors leveraged to the improving macro environment. 

In early March 2009, global equity markets were pricing a meaningful probability of the global economy experiencing a depression. Since that time, the likelihood of a depression has diminished and investors are increasingly focusing on the length and duration of the recovery phase. While equity markets have lifted accordingly, the rally in emerging markets has been roughly double that experienced in the developed world. This reflects the fact that the Global Financial Crisis (GFC) was largely a developed world crisis, with the financial systems of most emerging market countries only temporarily affected. In addition, the large fiscal and monetary stimulus in China that was announced in November 2008 has quickly restored a strong rate of growth in the Chinese economy, which has boosted many of the emerging market economies and also Australia. 

The rebound in the US Institute of Supply Management manufacturing index (ISM), which is a key indicator of economic growth, continued to improve in July with the ISM readings for new orders and production rising to their highest levels in two years. Investors also took comfort from US New Home Sales data in the month of July, which were stronger than expected, rising by 11% in the month, the strongest monthly rise since December 2000.

In July, the US Federal Reserve left the Federal Funds rate target range unchanged at 0 to 0.25 percent. In the UK, The Bank of England also left its key policy rate unchanged at 0.50%. Domestically, the RBA decided to leave cash rates unchanged at 3.0%, at its July and August meetings. 

While the Australian economy has been adversely affected by the GFC, its impact has been less acute. There is growing evidence that the Australian economy is starting to expand again, with the housing sector particularly buoyant.  Consumer confidence as measured by the Westpac/Melbourne Institute Index has surged to near two-year highs in August as hopes for a quick economic rebound emerged.  The index of consumer sentiment rose 3.7% in August, which is a rise of 27.8% since May, its largest three-month gain since the survey began in 1975, and has now risen 43.6% from its 2008 trough. The combination of these conditions have recently prompted Glenn Stevens (the Governor of the Reserve Bank of Australia) to start suggesting that the cash rate may need to need to rise from the current low level of 3.0% at some stage in the next 12 months or so. 

In the US, the stronger market sentiment in July helped lift the S&P500 by 8.6% for the month, which concluded the best five month positive streak since 1938. In the UK, the FTSE index also rose a similar amount for the month.  While, as at the end of July 2009, the Hang Seng (Hong Kong) and Nikkei (Japan) were back to levels not seen since September/October 2008 respectively. In Australia, the S&P/ASX 200 index finished the month 7.3% higher, its highest level since October/November 2008. Reflecting the increase in risk appetite, the Industrial, Material and Consumer Discretionary sectors outperformed strongly, whereas investors continued to reduce exposure to Healthcare, a relatively defensive sector.

In government bond markets, despite the improving sentiment toward global economic recovery and the rise in investor risk appetite, the yield on the 10 year US Treasury note fell to 3.48% as at the end of July (a fall of 6 basis points for the month). Meanwhile, Australian 10 year bond yields edged higher, finishing the month at 5.60% a rise of 8 basis points over the month of July.

The strong economic newsflow from China boosted both sentiment and prices in commodity markets during the month with significant increases in July for metals such as nickel (+13.6%), lead (+14.0%) and copper (+12.6%). Gold finished the month broadly unchanged as reduced risk aversion saw investors move into recovery orientated opportunities. Oil finished the month slightly down (-0.6% to $69.45/bbl) as destocking concerns negated expectations for a rise in oil demand flowing from economic recovery. 

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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