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Financial markets were less volatile in August. Credit concerns persisted and there were heightened worries about the slowdown in global economic growth, which affected commodities in particular.
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 August, while in the other major economies, central bankers are shifting their focus from rising inflation to slowing activity. Japan, the UK and ECB also left rates unchanged.
In Australia, further evidence of slowing domestic demand emerged. Despite ongoing high inflation, RBA concerns are now shifting to growth, leading to a 25bps cut in the cash rate in early September, with markets anticipating further cuts in future months.
Developed equity markets generally performed well, showing less volatility within the month. Most markets recorded modest gains. Performance of equity markets in August suggested that, although there are more aftershocks of the ‘credit crunch’ yet to be felt, markets may be steadying. Overall, the MSCI Developed Markets World Index rose 1.0% in August. Emerging markets generally performed poorly, with the MSCI Emerging Markets Index falling 5.1%
The US market steadied throughout August, with the S&P 500 up 1.2% over the month. Elsewhere, the ASX 300 had a good month, finishing up 3.1% even in spite of the poor performance in commodity prices. The European Stoxx was up 1.1%, while the Nikkei fell 2.3% as the Bank of Japan again revised its economic assessment downward. India’s Sensex Index gained 1.5% as new mining projects propelled the market, while the Brazilian Bovespa lost 6.4% on the back of weaker commodity prices. The Shanghai 180 lost another 13.4% in August and is now down 58% compared to its peak in October 2007. The Russian Trading System Index plunged 15.5% due to lower commodity prices and concerns over the Georgian conflict.
Shifts in expectations about the future direction in official interest rates and signs of inflation easing influenced movements in bond yields for August. Japanese bond yields fell 12bps as warnings about slowing growth continued. US bond yields fell steadily after the Fed left rates unchanged, ending August down 18bps. European yields fall 23bps as data revealed that the Euro-zone contracted in the June quarter. Rate cute speculation drove Australian 10-year Commonwealth bond yields down 48bps to 5.75%
The A$ crashed with the commodity prices that had supported it, falling 8.8% against the US$. The A$ was also hindered by interest rate expectations, down against the Yen (-7.4%), the Euro (-3.1%) and Sterling (-0.6%), as well as on a trade-weighted basis (-6.2%). The US$ rose as foreign growth forecasts fell, ending August up against the Yen (0.9%), Euro (5.9%), and Sterling (8.2%).
Commodity prices were mostly weaker in August, as concerns about slowing global growth continued to affect commodity markets. Precious metals fell sharply, with gold and silver down 9.0% and 21.3% respectively. Base metals were mostly lower, with copper (-9.1%) and aluminium (8.4%) recording large falls, although nickel gained 8.8% as Xstrata announced it was suspending operations in the Dominican Republic. The end of July saw the London Metal Exchange Index down 6.1%, gas down 10.9% and West Texas Intermediate Oil down 6.5%. Overall, the CRB index of commodity prices finished 4.3% lower in August.
Source: Access Capital Advisers Pty.Ltd
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