Markets update August 2013

Transcription

1 Markets update August 2013 Global share markets retreated in August amid increasing US Federal Reserve taper talk and escalating geopolitical tensions. The Australian share market made good gains, commodities rallied and the Australian dollar fell further against the US dollar. At a glance Global share markets weaker Commodity prices post further gains Global bond yields rise Australian share market stronger Australian dollar extends its slide against the US dollar Global share markets fall Global share markets pulled back in August after US Federal Reserve (Fed) chairman, Dr. Ben Bernanke, gave his strongest hint yet that the central bank would begin tapering its massive quantitative easing (QE) program by year s end. Whilst investors have been anticipating the end of the Fed s QE program ever since Bernanke first raised the idea back in May, his comments nonetheless had a significant impact on market sentiment as such a move would essentially mean the end of the easy money, or low interest rates, that has helped boost economic growth in the world s biggest economy. Ironically, it s only because the US economy is actually improving that the Fed is looking to unwind its QE initiative in the first place. Adding to investors concerns were reports late in the month that the US and its allies were preparing a military response to the Syrian government s alleged use of chemical weapons against its own people. News of a potential strike prompted investors to switch out of risk assets like shares in favour of traditionally defensive assets like bonds and cash. At the country level, the US benchmark S&P 500 Index fell 3.0% and this had a negative knock-on effect elsewhere with stocks in the UK (-3.1% 1 ), Japan (-2.0% 2 ) and Europe (-1.7% 3 ) also closing the month lower. Collectively, global share markets ended the month down 2.3% 4 (see following chart). 1,540 MSCI World Price Index - Year to 31 August ,510 1,480 1,450 1,420 1,390 1,360 1,330 1,300 1,270 1,240 1 UK shares measured by the FTSE 100 Index 2 Japanese shares measured by the Nikkei 225 Index 3 European shares measured by the EuroStoxx 50 Price Index 4 Global shares measured by the MSCI World (Price) Index

2 Commodities higher Commodities made further gains in August, with the Thomson Reuters/Jefferies CRB Commodity Index up 2.5%. Much of the gain can be attributed to strong increases in oil and gold prices; both of which rose amid ongoing political tensions in Egypt and expectations the US and its allies will soon launch a military strike against Syria. Oil benefited from supply concerns given Syria s proximity to major sea routes and important pipelines. The risk that Iran a major oil producer and an ally of Syria could be drawn into the conflict also contributed to supply fears. Gold on the other hand benefited from its traditional safe haven status. Oil closed the month up 2.5% at USD a barrel and is now 15.7% higher for the calendar year. Gold gained 4.7% to close the month at USD1, an ounce. For the calendar year, gold is down 16.2%. Meanwhile, base metals were mostly higher in August, supported by some encouraging economic data in advanced economies and signs that Chinese growth is beginning to stabilise. Iron ore (6.0%) led the gains, followed by lead (4.3%), zinc (3.6%), copper (3.0%) and aluminium (0.5%). By contrast, nickel fell 0.6%. 325 Thomson Reuters/Jefferies CRB Commodities Index - Year to 31 August RBA cuts cash rate to 2.50% The Reserve Bank of Australia (RBA) cut interest rates to a record low of just 2.50% following its early August board meeting. The rate cut the RBA s fourth in the past 12 months suggests policymakers remain concerned about the prospects for growth outside of the resources sector, particularly as business and consumer confidence remain weak and as retail sales continue to disappoint. With inflation still under control and domestic growth expected to be below trend again this year, the RBA maintains its easing bias with any further rate cut(s) likely to be dependent on how economic data unfolds over the coming months. As an aside, it was the first time since 1990 that the central bank has cut interest rates during an election campaign. Meanwhile, the European Central Bank (0.50%), the Fed (0-0.25%), the Bank of England (0.50%) and the Bank of Japan (0.10%) all left their respective benchmark interest rates on hold during the month.

3 Global bond yields higher Government bond yields were mostly higher 5 in August after the Fed gave further indications it would begin to unwind its massive QE initiative by the end of the year. However, rising tensions between Syria and the West in the wake of the Syrian government s alleged use of chemical weapons did see yields pull back a little later in the period as investors sought the relative safety of major government debt. The yields on 10-year US Treasuries (2.78%), UK gilts (2.77%), German bunds (1.86%) and French bonds (2.47%) were all higher. By contrast, Japanese 10-year government bond yields went the other way, falling to 0.72% on the back of the Bank of Japan s ongoing market operations. In Europe s troubled periphery, 10-year government bond yields were mixed; flat in Italy (4.40%), up in Portugal (6.73%) and down in Spain (4.54%). Here in Australia, 10-year government bond yields rose 17 basis points to 3.90%; the local market also affected by Fed taper talk and escalating political tensions between Syria and the West. Importantly, Australian bonds widely considered a safe haven investment on account of their AAA credit rating continue to represent better value than many of their global counterparts, including US Treasuries. In fact, the yield differential between Australian 10-year bonds and their US equivalent is currently 112 basis points (or 1.12%). However, this yield advantage may not last much longer should the US economy continue to improve as expected. Australian shares higher The Australian share market made good gains in August, with the S&P/ASX 200 Accumulation Index closing the period 2.5% higher. The local market benefited from the RBA s latest rate cut decision, stronger commodity prices and some encouraging economic data out of China, our largest trading partner. A better-than-expected domestic corporate earnings season which is to say that results were not as bad as many had feared also was positive. Limiting the market s gain were Fed taper talk and news that the RBA had downgraded its 2013 domestic growth forecast. So far this year, the Australian share market has returned 13.7%. This compares with 28.8% in Japan, 14.5% in the US, 8.7% in the UK and 3.2% in Europe. 43,000 42,000 41,000 40,000 39,000 38,000 37,000 36,000 35,000 34,000 33,000 S&P/ASX 200 Accumulation Index - Year to 31 August Bond yields have an inverse relationship with bond prices, meaning that when yields rise, prices fall (and vice versa)

4 Australian dollar falls further The Australian dollar (AUD) continued its decline against the US dollar in August amid ongoing Fed taper talk, mounting geopolitical tensions and the RBA s decision to cut the official cash rate to a record low. However, the local unit did find some support in the form of stronger commodity prices. The AUD fell as low as USD before eventually closing the month 1.4% lower at USD For the calendar year, the AUD is down 14.4%. A combination of falling domestic interest rates, Fed tapering expectations, local mining sector weakness and slower Chinese and domestic growth suggests the AUD will continue to trend lower over the short to medium term. $ $ $ $ $ $ $ $ $ $ $ Australian dollar versus US dollar - Year to 31 August 2013 Looking ahead Volatility will remain a key theme for global share markets in the near term, particularly as the market braces for the end of the Fed s QE program. That said, global share markets are still expected to post further gains this year, particularly as the US and global growth outlooks improve and as investors continue to move away from low-yielding bonds and cash in favour of riskier assets. Here in Australia, the mining boom which had kept the economy afloat in recent years appears to have run its course as investment in the resources sector continues to decline. Unfortunately, the non-mining sectors are unlikely to be able to pick up the slack left by the slowdown in mining activity, suggesting that domestic growth this year will again be below trend. In terms of interest rates, the RBA maintains an easing bias and could yet lower the official cash rate again as it tries to boost growth outside of the local mining sector. Recent AUD weakness will certainly help the RBA s cause. Of course, any decision to cut interest rates will be balanced against the global growth outlook. Importantly, Australian interest rates remain relatively high compared to those in other major countries, giving the bank some room to move should the need arise.

5 Important note The information in this document has been prepared by Suncorp Financial Services Pty Ltd (SFS) AFSL & ACL and is current as at 3 September This information does not take into account any person s objectives, financial situation and needs. Before acting on this information you should consider whether it is appropriate for you having regard to your own objectives, financial situation and needs and you should seek your own financial and taxation advice. This document is for information purposes and is not to be reproduced or distributed to any person without the prior written consent of SFS. The views expressed in this document are general and SFS takes no responsibility for the accuracy of information quoted and obtained from other sources.