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Financial markets took another fall in June, as concerns about credit problems again arose and economic growth forecasts were downgraded. US data were still weak and the consensus now expects several quarters of low to moderate growth. The Fed left rates unchanged at 2.0% in June, emphasising inflationary concerns. Markets believe the US rate cutting cycle has now ended. In the other major economies, central bankers are increasingly shifting their focus from concern over uncertainty in global financial markets towards rising inflation. Japan and the UK left rates unchanged in June, however the European Central Bank increased official rates by 25bps in early July, as did a number of Asian central banks. 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 and July. Equity markets were down in June. Performance of equity markets in June suggested that beliefs that the low point of the ‘credit crunch’ had been reached may be erroneous and the share prices may yet have further to fall before the recovery begins. Overall, the MSCI Developed Markets World Index fell 8.4% in June, with Germany and Hong Kong among the weakest performers, whilst emerging markets as a whole had an even worse month, down 10.1%. The US market fell steadily throughout June, with the S&P 500 down 8.6% over the month. Elsewhere, the ASX 200 finished down 7.8% with energy the sole sector to record gains, while the European Stoxx was down 11.1%. In Asia, the Shanghai 180 fell 22.6% for June after authorities unexpectedly raised the reserve requirements on deposits of banks. The Hang Seng finished down 9.9%, while the Nikkei fell 6.0% amidst the longest losing streak on the Nikkei since 1954. India’s Sensex Index fell heavily, down 18.0% while the Brazilian Bovespa took a tumble after two months of record highs, down 10.4% for June. The sell off in equities saw money shift into bonds, leading to falling yields in most markets. Japanese bonds yields rose significantly early, before falling as the equity market losing streak took hold, down 16bps overall. US bond yields were less volatile overall, down 18bps. Australian 10-year Commonwealth bond yields were driven by unexpectedly high growth data and then the RBA Board minutes, which downplayed the case for further rate hikes, with yields ending the month down 8bps at 6.45%. The $A had a mixed performance in June, rising 0.2% against the US$, with some forecasters suggesting parity against the US$ may occur for the first time since the currency was floated. The A$ was also up 1.3% against the Yen, however fell against the Euro (-0.7%) and Sterling (-0.1%), ending up 0.8% on a trade weighted basis. The US$ rose against the Yen (0.5%), however fell against the Euro (-1.3%), and Sterling (-0.6%). Precious metals rose again in June, with gold and silver up 3.9% and 4.7% respectively. Results for base metals were mixed, with copper up 8.3% with strikes in Peru and forecast production deficit for 2008, however nickel fell 2.1%. The end of June saw the Economist Base Metals Index up 0.1%, gas up 14.2% and the price of West Texas Intermediate Oil up 9.9%. Overall, the CRB index of commodity prices finished 4.6% higher in June. This article provides general information only and may not be relied on as legal or financial advice. |
