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July was a volatile month in markets, with problems in the US sub-prime mortgage market sending ripples through global financial markets. Risk aversion rose: yields on lower-rated corporate debt increased, while Government bond yields fell; the flow of debt issuance and private equity deals dried up; stock markets succumbed (but, not before posting record highs); and high-yielding currencies and commodity prices sold off. Sentiment in most markets at month’s end was fragile. It is too early to see any impact on the economy. However, there are reasons to believe the impact on economic growth will be muted and the outlook for the global economy still is good and quite supportive for financial markets. Central banks continued to focus on inflation risks, while keeping a close eye on credit market developments. Low unemployment rates and rising energy prices remain the key concerns. High Q2 CPI numbers caused the RBA to raise interest rates by 25bps to 6.50% in early August. The crisis of confidence in credit markets had a clear impact on risk appetite, liquidity and pricing this month. The effect was witnessed in most major economies and across the financial markets. Overall for July, the global developed share market index fell 3.1%. The United States S&P 500 dropped 3.2%, the European Stoxx down 3.8%, the Australian ASX 300 finished 2.0% down, while Japan’s Nikkei index decreased by 4.9%. Share prices in emerging markets currently stand consistent with early July levels. The Australian dollar went on a roller-coaster ride in July. It started the month just under US86c, then soared to briefly flirt with the US89c level before slumping back down to US85c as risk aversion took its toll and commodity prices wobbled. Similarly, the A$ TWI ranged between 68 and 71. Amongst the major currencies, against the US dollar, the euro posted a new record high ($US1.385) and the yen appreciated from 122.5 to 118.5 (per $US). Commodity prices also rose and fell on the tide of risk aversion. Concerns about a potential slowdown in the US sapping demand for commodities seemed misplaced after the IMF upgraded its forecasts for global growth. The CRB index of commodity prices finished the month 2½% higher, although this was partly a product of $US weakness. The RBA index of commodity prices (in $A) fell 1.9% in July. Please note that this economic commentary does not constitute advice. Source: Access Capital Advisers Pty.Ltd This article provides general information only and may not be relied on as legal or financial advice. |
