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Financial markets were volatile in January, with stock markets selling off and bond markets rallying. Economic news from the US was disappointing and the IMF downgraded its forecasts for global growth in 2008. Adding to the negative sentiment were concerns that the credit crunch would claim more casualties, e.g. amongst US bond insurers, and cause more write-downs and losses.
Towards the end of the month markets were calmed by the US Fed’s decision to cut interest rates by 125bps. In early February, the Bank of England also cut rates and the ECB switched its policy bias from tightening to neutral. Meanwhile, money markets were functioning better and there was increased stability in the US corporate paper markets. Altogether, this added to the feeling that even if the US is entering a recession, it will be a mild one. In sharp contrast, the Reserve Bank of Australia weighed up financial uncertainty against strong domestic demand and decided on a 25bps interest rate rise in early February to rein in inflation. It has signalled that further increases are likely.
A volatile start to the year saw stocks fall rapidly around the globe before the US Fed intervened. Fourth quarter earnings results for the US revealed large losses in financials, but generally positive results in other sectors. Double digit drops in most global markets were reversed somewhat in the last week and a half, with this momentum continuing into early February.
Overall for January, the S&P 500 fell 6.1%and the European Stoxx was down 13.0%, leading to an 8.5% drop in the global developed share market index. Locally, the ASX 200 fell by 10.9% after decreasing by as much as 18% early on. Asian markets were hit hard with the Shanghai 180 and the Hang Seng dropping 15.0% and 15.7% respectively, whilst the Nikkei recorded a comparatively mild fall of 11.2%. Emerging markets lost 12.6% in January.
Uncertainty over global economic conditions and weak share markets saw a month of volatility in bond markets. US bond yields reached a four and a half year low on the 22nd,before bonds sold off over the final days, leaving yields recording a 40bps drop for the month overall. Australian bond yields fell less under stronger domestic growth prospects and still high inflation forecasts. Australian 10-year Commonwealth bond yields finished 24bps down at 6.09%.
The $A had a solid month against most major currencies, gaining 2.3% against the US$ to finish at 89.6 US cents. A return to carry trading later in the month helped the A$ regain ground lost earlier while continued speculation over economic conditions in the US played against the $A. The US$ fell against the yen (-4.7%), euro (-1.8%) and sterling (-0.1%). Two rate drops of a combined 125bps placed downward pressure on the US$.
Commodity markets overcame slowing demand to record large gains for several commodities, partly as the result of new-year investment flows, but also due to supply problems across several major producers. However, the West Texas Intermediate oil price fell 4.4% upon lower growth prospects in the US and easing geopolitical tensions which had elevated prices over recent months. The major metals rose, helping the Economist base metal index climb by 6.3%. Gold and silver both performed strongly and reached new highs as investors sought the relative safety of the precious metals. Overall, the CRB index of commodity prices finished 2.7% higher in January.
Source: Access Capital Advisers Pty.Ltd
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