Economic And Market Summary

Investment markets deteriorated in June over concerns about the outlook for global growth. Data released in June indicated output and demand were continuing to expand, although some indicators suggested the pace may be slowing. However, the biggest moves were in confidence indices rather than in measures of output or demand, with sentiment indicators falling notably in June in both the US and Europe, with a smaller fall in Japan. Major international institutions – the OECD, the G20 and the IMF – have all recently recommended an early return to higher interest rates and a start on cuts in public spending. 

Heightened uncertainty about the prospects for European debt and global growth has been reflected in increased volatility in financial markets. Market sentiment has become more cautious as prices have been more volatile. Prices for riskier assets, such as stocks and many commodities, continued to fall in June; safe haven assets such as government bonds and gold were preferred.

Stock markets fell during June, following on from losses in May. The MSCI global stock price index fell 3.8% in the month and 11.1% in the quarter. The poor final quarter to the financial year reduced the 12-month return on the index to 10.3%.  Stock markets in emerging economies, where debt concerns are lowest and growth is highest, continued to perform better than those in developed markets. The MSCI emerging markets price index lost just 0.7% in June and increased by 17.3% over the financial year.

Offshore markets reacted negatively to US labour market developments, as well as European debt concerns. The US S&P500 index fell 5.4% in June and volatility was above average.  Germany’s DAX index surprisingly was unchanged in the month of June, and fell just 3.1% in the quarter. In contrast, the UK’s FTSE index fell 5.2% for the month and 13.4% for the quarter.  The S&P/ASX 200 Index fell 2.9% in June. Despite the heated debate about the impact of the Resource Profit Super Tax (RSPT), subsequently renamed the Minerals Resource Rent Tax (MRRT), the Australian market moved broadly in line with other developed markets – it fell 11.8% in the June quarter and rose 8.8% over the financial year.

The deterioration in the outlook for growth was reflected in falling yields for low-risk government bonds and wider credit spreads.  After beginning the quarter at 3.83%, the yield on 10-year US Government bonds dropped another 35 basis points in June to end at 2.93%.  This represented a decline of 61 basis points for the financial year.  Australian bond yields also fell in June, by 28 basis points to 5.09% for 10 year bonds.  The fall in bond yields has been less pronounced in Australia, reflecting the firmer domestic economic conditions and the special ‘safe haven’ status of US bonds.  Over the year to June, Australian bond yields declined by 43 basis points and the yield spread over US bonds increased to 216 basis points. 

The Commodity Research Bureau (CRB) index of world commodity prices fell 1.4% in June and 2.8% in the quarter.  Despite the weak June quarter, the CRB index still recorded an increase of 16.1% for the year to June 2010. Prices of commodities most closely linked to global growth bore the brunt of the falls in June, with copper, nickel and zinc all falling by more than 5%. However, like the broader index, these metals posted good rises of 15% or more over the financial year.  Gold continues to be favoured, achieving record prices above US$1,260/oz during the month. The gold price rose 32.3% over the year, of which 12.1% occurred in the June quarter reflecting gold’s status as a safe haven when markets are troubled. Despite the turbulence in markets, the Australian dollar appreciated 1% against the US dollar in June, ending the month at US$0.85. 

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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