News: Economic and Market Summary: August 2007

August saw markets and policymakers deal with a credit crunch, as fears that originated with sub-prime (ie high-risk) mortgages in the US affected prices and liquidity across the spectrum of financial markets.  Bond markets rallied at the expense of more risky commodity and equity investments, and high-yielding currencies such as the A$ suffered as speculative trades were unwound.

Central banks including the Reserve Bank of Australia were forced to add money to the financial system to increase liquidity and restore calm.  The US Federal Reserve is now widely expected to cut 25 or 50 bps off their official cash rate on 18 September.  In other countries, monetary authorities have delayed expected increases in interest rates.

August data releases in Australia showed wage pressures remain contained, business investment was better than expected, and the national accounts showed that GDP growth lifted by 0.9% in the June quarter to be 4.3% higher than a year ago.  The RBA maintained the official cash rate unchanged at 6.50% in early September but a hawkish August monetary statement has investors pricing in at least one more rate rise for this policy cycle.

Australian 10-year Treasury bond yields finished at 5.92% in August as a sharp rise in risk aversion caused investors to seek the relative safety of Government bonds.  Indeed, bond yields fell sharply across the entire maturity spectrum over the month.  The Australian-US bond spread increased a further 12bps reflecting the divergence in the direction of official cash interest rates.

After a shaky start to the month, equity markets rallied once credit crunch concerns began to ease.  However, global equities remain vulnerable under the current high levels of market volatility.  Overall for August, the global developed share market index fell 0.2%.  The United States S&P 500 gained 1.3%, the European Stoxx finished unchanged, the Australian ASX 300 finished 2.2% up, while Japan’s Nikkei index decreased by 3.9%.  Share prices in emerging markets fell 1.2% for the month.

The Australian dollar continued to trade wildly in August.  It started the month just under US86c, then plummeted below the US80c level before returning to favour at month end - to finish just under US82c - as markets became less volatile.  On a trade-weighted basis, the A$ ranged between 69 and 63.

The volatility in world financial markets weighed heavily on commodity markets.  Oil prices fell back to below the $US70 per barrel mark, but were able to pick up ($US74pb) late in the month as markets resettled.  Metal prices dropped significantly as speculators unwound positions and concerns about US economic growth increased.  The Economist base metal index finished August 6.5% down.  Overall, the CRB index of commodity prices finished the month 1.7% lower.

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.
Prime Super is a Regulated Superannuation Fund issued by Farm Plan Pty Limited ABN 81 067 241 016, AFSL 219723.  A Product Disclosure statement can be obtained from the issuer and should be considered before deciding whether to acquire, hold or dispose of an interest in the Fund.