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Events in the US economy continued to dictate terms on markets in March, especially the generally negative economic data releases and the collapse of Bear Stearns. The data suggested the US economy may contract modestly in the first half of 2008, followed by weak growth in the second half. The Fed’s attempts to stimulate the US economy with a 75 basis point cut in the federal funds rate, and with a decision to accept suitable rated paper from the large US investment banks as security against liquidity proved to be the circuit breaker in financial markets.
In Australia, the economy remained strong, with robust growth forecast for 2008 and unemployment continuing at 33 year lows. Inflation remains a concern however there is evidence that domestic demand is moderating, resulting in a decision by the RBA to leave interest rates unchanged in April. In the other major economies, central bankers are continue to take a cautious policy approach based on concern over economic conditions in the US and volatility in global financial markets. The Japanese, UK and European central banks all kept rates steady in March.
Equity markets worldwide fell in March, although many markets were showing signs of recovery in the latter stages of the month, after the Fed announced a 75 basis point cut in the target rate. Most of these losses have been attributed to ongoing market volatility and bad economic news coming from the US. This is likely to continue at least for the next few months until the economic situation in the US becomes more certain. Overall, the MSCI developed markets world index fell 2.4% in March whilst Emerging markets as a whole performed fairly poorly, falling 4.3%.
The US was the best performer of the major developed nations in March, with the S&P 500 falling by just 0.6%. Elsewhere, the ASX 200 finished down 3.9% with poor results across most industry sectors. The European Stoxx was down 2.7%, and in Asia, the Shanghai 180 fell 18.9%, the Hang Seng finished down 6.1%.and the Nikkei lost 7.9%. The significant falls in Asian markets – which recovered towards the end of the month - have been attributed to fears of the effect of a possible US recession on China’s economy and global financial turmoil leading to lower investor appetite for risk.
Concern over global economic conditions and weak share markets continue to influence bond markets. US bond yields continued their downward trend in March, finishing 10bps lower for the month. While the 75 basis point cut in official interest rates helped to keep US bond yields low, the difficult credit market conditions reduced the effectiveness of monetary policy. Australian 10-year Commonwealth bond yields were driven by falls in US bond yields and the ongoing bad economic news coming out of the US, finishing 17bps down at 5.87%.
The $A fell against all the major currencies in March, down 1.9% against the US$ to finish at 91.4 US cents. Commodity price fluctuations and the safe-haven purchasing of the Yen dominated movements in the A$. The US$ fell against the Yen (-3.6%), Euro (-3.9%) and made small gains against the sterling (0.3%). The US$ was dominated by ongoing announcements of poor economic data and concerns that the US is heading into recession.
Emerging markets economies continued to expand strongly. One consequence; very large increases in the contract prices for coal and iron ore which, inter alia, will flow through into a considerable boost to revenues of Australian producers and, in turn, the broader economy. At the same time, March saw falls in the spot prices for many commodities with the Economist base metals index down 0.2%, the gold price down 4.0% and the price of West Texas Intermediate Oil down 0.3%. Overall, the CRB index of commodity prices finished 3.9% lower in March.
Source: Access Capital Advisers Pty.Ltd
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