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Financial markets were more settled in May, although concerns about credit problems, increased inflation and the ongoing effects of oil prices lingered. US data, although still weak, seemed to support views that the present slowdown will not be deep or long-lasting. The Fed did not meet in May, although the increased headline inflation rate combined with rising consumer inflation expectations have led markets to factor in a rate rise by the end of 2008.
In Australia, further evidence of slowing domestic demand emerged. Although inflation, currently at 4.2%, is running at a higher rate than the RBA would like, the Bank believes that it should decline over time if demand moderates as is currently expected, leading to rates being left unchanged in June. In the other major economies, central bankers continue to take a cautious policy approach based on concern over uncertainty in global financial markets and rising inflation, with Japan, the UK and the European Central Bank leaving rates unchanged in May.
Equity markets were mixed in May. Concerns about oil prices and inflation influenced stock markets, resulting in a month of volatility, although far milder than that of recent months. Performance of equity markets in May reflected the view that, although the ‘credit crunch’ is far from over, the low point may have been reached. It remains to be seen, however, if this is a sustained turnaround. Overall, the MSCI developed markets world index rose 1.2% on the back of good performances in Japan and Germany, whilst emerging markets as a whole performed even better, gaining 1.5%.
The US market alternated between good and bad weeks, with the S&P 500 up 1.1% over the month. Elsewhere, the ASX 200 also finished up 1.1% with continued strength in the energy sector. The European Stoxx was down 0.4%, and in Asia, the Shanghai 180 fell 8.8% following the earthquake, the Hang Seng finished down 4.7%, while the Nikkei gained 3.5%. India eased after a strong April, down 5% for May while the Brazilian Bovespa continues to be the best performed of the large emerging markets, rising 7% for May.
Government bonds were sold in May as markets responded to central bank talk of inflation risks. US bond yields moved up in May, finishing the month up by around 25 basis points. Australian 10-year Commonwealth bond yields were driven by the pattern of US yields, ending the month up 25 basis points at 6.53%.
The $A rose against all the major currencies in May, up 1.4% against the US$ and reaching a new 24-year high of 96.32 US cents, with some forecasters suggesting parity against the US$ may occur for the first time since the currency was floated. Commodity price fluctuations and the dumping of the Yen as investor risk aversion fell dominated movements in the $A. The US$ rise against the Yen (1.5%), Euro 0.4%), and Sterling (0.3%). The US$ was supported by expectations that the rate cutting cycle in the US has ended, while the Yen was hampered by comments from the Bank of Japan governor hosing down expectations of an interest rate rise.
Precious metals regained some lost ground in May. Results for base metals were generally poor, with nickel falling 23.4%, while copper prices fell 6.3% as Chilean strikes ended. The end of May saw the Economist base metals index down 5.1%, the gold price up 2.1% and the price of West Texas Intermediate Oil up 11.6% for the month. Overall, the CRB index of commodity prices finished 2.8% lower in May.
Source: Access Capital Advisers Pty.Ltd
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