Economic And Market Summary

Over the last several months, equity markets have declined significantly, reflecting concerns about the slow pace of economic growth and unresolved European sovereign debt issues. Markets fell further in September, with the US S&P 500 Index down 7.2% and the MSCI World Price Index down 6.3%, both in local currency terms. The Australian S&P/ASX 200 Price Index fell 6.7% over the course of the month. Equities have performed poorly since the start of the financial year, however, markets rallied in early October, reclaiming some of these losses.

The global economic uncertainty has impacted consumer and business confidence in Australia, and there are signs that the economy has begun to soften. Consumers remain cautious, and have continued to save more of their income, with the savings rate near 20 year highs. As a result, retail sales growth has been weak. The unemployment rate increased to 5.3% in September, up from 4.9% in April. While the unemployment rate remains low by international standards, the level of full time jobs growth has slowed meaningfully. 

Within the US, employment growth remains weak and the unemployment rate has stayed high at 9.1%. US federal and state governments have cut spending in order to reduce deficits. This reduction in public sector jobs has partly offset the creation of jobs in the private sector. Economic indicators improved slightly during the month, and are at a level consistent with modest growth as opposed to contraction or recession. However, some sectors of the economy remain weak, and small business confidence remains very low. This is a concern as small businesses have traditionally been drivers of US growth and job creation.

European sovereign debt concerns continued to dominate headlines and these issues also threaten the health of the European financial system. European banks hold the majority of European sovereign debt, and many institutions’ solvency would be impacted in the event of a debt default or restructure. There has been an increased commitment from European leaders to recapitalise the banking system, and the European bailout fund was recently increased to €440 billion. That said, policymakers have yet to find a sustainable solution. Economic conditions continued to decline during the month, with heavily indebted economies such as Greece, Ireland, Spain and Italy experiencing the sharpest declines. Growth in the ‘core’ economies such as Germany and France has also moderately substantially, with indicators suggesting little or no economic growth. This has led to increasing risk that Europe is close to a recession.

Growth in the emerging world has slowed, largely due to authorities’ attempts to cool economies to rein in high and rising inflation. That said, a downturn in Europe and the US would also have an impact on these economies, and as a result central banks have moved to a more neutral policy stance. Chinese consumer price inflation was 6.1% in the year to September, in line with market expectations.

The increase in investor risk aversion saw government bond yields fall further during the month (that is, prices have risen). As a result, Australian and overseas fixed interest have delivered strong returns over the month, and over the last 12 months. Markets have priced in the likelihood of interest rate cuts in Australia, which has put downwards pressure on the Australian dollar. The value of the Australian dollar fell substantially during the month, decreasing by 9.8% against the US dollar. 

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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