Oct 08

Mini Economic and Markets Update

Compared to the downbeat global economic data and sharemarket performance of August, the month of September was quite the opposite. The risk trade was the success story over the last month with commodities, sharemarkets (particularly small cap) and the Australian dollar all showing strong gains.

In Australia the positive sentiment started early September with the announcement of a better than expected unemployment figure of 5.1% which was repeated again yesterday thanks to fifty thousand new jobs (for the new Australians entering the workforce). During September, the positive sentiment resulted in Australian Government Bond yields increasing significantly which for bond investors resulted in a 0.90% loss for the UBS Composite index. The interest rate market had also priced in an expected interest rate rise announcement from the Reserve Bank last Tuesday but it wasn’t to be. Governor Glenn Stevens suggested the fragility of the global economy and the current containment of local inflation were the main factors for leaving the cash rate at 4.50% but with Australian banks giving their intention of raising rates over and above the Reserve Bank’s actions, a double interest rate hit to Australians was probably seen as unnecessary.

Whilst the global economy has produced some better than expected economic data recently (mostly Germany, China, and some mixed data from US) plus expectations of a double dip recession dying down, the interesting battle being played out relates to currency. The United States has announced its intention of quantitative easing (akin to printing more money) thus weakening the US Dollar across all currencies which has resulted in record high prices for both the Japanese Yen and Australian Dollar. A high Japanese Yen is quite damaging to the exporting Japanese economy as their goods will be more expensive to purchase and a stronger Euro provides little help to the already very weak European economy. The USA is also negotiating strongly with China in the hope it will increase the value of their currency (the Renmimbi) as it looks to slow China a little for some balance in this two speed global economy.

These currency wars combined with continued banking problems in Europe (particularly Ireland of late) suggest there is still significant risk in the global system and there is no obvious conclusion to the outcomes to the global financial crisis. So whilst the risk trade was popular for September it could very well turn around at any time. With volatility of sharemarkets reducing recently it is only a matter of time before it starts to increase again. So, any sharemarket expectations should include higher volatility expectations as well and investors need to continue to focus on the long term.

   Send article as PDF   

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

This site uses Akismet to reduce spam. Learn how your comment data is processed.


Get every new post on this blog delivered to your Inbox.

Join other followers: