Economic And Market Summary

Equity markets rallied strongly in October, ending several months of negative returns. The Australian S&P/ASX 200 Price Index was up 7.2% over the course of the month and global equity markets also experienced similar gains. The US S&P 500 Index was up 10.8% and the MSCI World Price Index up 8.5%, both in local currency terms. Strong gains during the month reflected hopes that comprehensive action from European policymakers would help to resolve the sovereign debt crisis.

Towards the end of the month, European leaders announced a series of measures designed to address the escalating sovereign debt crisis. These included an increase in the size of the European bailout fund through leverage, a planned recapitalisation of the banking system and a ‘voluntary’ 50% private sector hair cut on Greek government bonds which would reduce the projected debt burden for Greece. This agreement was reached after a lengthy period of negotiations, reflecting the difficulty in designing a plan which would be acceptable by all the parties involved. However, in early November, shortly after the announcement of the deal, Greek Prime Minister George Papandreou announced that he would put the latest bailout package to a referendum for the people of Greece, calling into doubt Greece’s willingness to enact the harsh austerity measures called for as part of the agreement. This raised the prospect of a disorderly Greek default, causing a sharp and sudden selloff in equity markets. Papandreou later withdrew the referendum call after the main opposition party indicated that they would back the bailout package. Days later, Papandreou resigned as Prime Minister, to be replaced by an interim prime minister under a unity government. This highlights the difficult task political leaders face in maintaining support for unpopular austerity measures being demanded in exchange for bailouts. As such, market volatility is likely to continue as these developments unfold.

Within the US, the high unemployment rate of 9.0% in October continues to weigh on consumer confidence and spending, and thus economic growth. While the unemployment rate fell slightly during the month, the modest rate of jobs creation remains insufficient to achieve a substantial reduction in the unemployment rate. Overall, most key economic releases remain consistent with low growth, as opposed to economic contraction or recession. 

Emerging market economies fared relatively well through the previous global recession, and growth remains strong compared to the developed world. Some emerging countries face high inflation, and central banks had been increasing interest rates in order to reduce inflationary pressures. That said, the global economic slowdown has also affected growth in the emerging world, and as a result, many central banks have moved from a tightening bias to a more neutral policy stance, with some already cutting interest rates.

In Australia, the Reserve Bank of Australia (RBA) cut the official cash rate to 4.5% in November. The rate cut reflects concern over the slowdown in the global economic growth, and weakness in some sectors of the economy. While the overall outlook for the Australian economy remains favourable relative to the rest of the developed world, export oriented industries which have not benefitted from the mining boom (such as manufacturing and tourism) have struggled with the high Australian dollar and higher interest rates. Consumer and business confidence also remain weak, at levels consistent with weak or negative economic growth.

The Australian dollar appreciated substantially over the course of the month, increasing 9% versus the US dollar to end the month at US$1.05. The Australian dollar tends to perform well when risk markets rally. However, the strong risk rally also saw defensive asset classes such as fixed interest underperform in October. Both Australian and overseas fixed interest delivered negative returns as government bond yields increased.

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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