MARKET AND ECONOMIC OVERVIEW

Australia

• The Reserve Bank of Australia (RBA) left the cash rate unchanged at 2.5% at the 5 November Board meeting.
• The Bank said that the Australian dollar was “uncomfortably high”, noting that “a lower level of exchange rate would likely be needed to achieve balanced growth in the economy.”
• The RBA was fairly upbeat in its assessment of the non-mining sectors of the economy, suggesting that “there was mounting evidence that monetary policy was supporting activity in interest-rate sensitive sectors and asset values.”
• Economic data released in November was mixed.
• The Westpac consumer confidence index rose by 1.9% in November, to be around 7% above long-term average levels.
• The NAB business survey showed that business confidence fell back in October, after a post-Federal election surge (to +5pts +12pts in September). Business conditions were unchanged at a below average -4pts.
• Employment increased by a modest 1,100 jobs in October, with the unemployment rate stagnating at a revised 5.7%.
• Retail sales exceeded expectations rising by 0.8% per month and 0.7% per quarter in September, respectively.
• The wage price index rose by a modest 0.5% per quarter to 2.7% per year in the September quarter. Wages growth remains subdued across both the private and public sectors.

United States

• Outgoing US Federal Reserve Chairman Dr Ben Bernanke reiterated that the Fed Funds rate could remain near zero “for a considerable time after asset purchases end, perhaps well after the (6.5%) unemployment threshold is crossed.”
• US economic data surprised most in November following the 16-day partial government shutdown in October. The better data increased market expectations of a potential ‘taper’ of US Federal Reserve asset purchases at its mid-December meeting.
• September quarter GDP growth expanded at a 2.8% annualised pace, rising from 2.0% per year in the June quarter.
• The September employment report was strong, rising by a healthy 204,000 jobs, with some upward revisions in previous months. The unemployment rate rose by 0.1% to 7.3%, as the participation rate fell to 62.8% from 63.2%.

Europe

• The European Central Bank (ECB) surprised the market by lowering its benchmark interest rate by 25 basis points to a record low 0.25% at its 7 November meeting.
• ECB President Mario Draghi warned of a “prolonged period” of low inflation, noting that interest rates will remain low, or go lower for an “extended period”, re-stating the downside risks to Eurozone growth.
• Credit ratings agency Standard & Poor’s (S&P) downgraded France’s sovereign credit rating by one notch to AA, reflecting concerns about the Hollande government’s ability to implement growth-friendly reforms.

United Kingdom

• September quarter GDP expanded by 0.8% per quarter to 1.5% per year – its fastest pace for three years on the back of strengthening consumer spending and business investment.
• UK inflation fell more sharply than expected in October, with CPI inflation dropping to 2.2% per year from 2.7% – its lowest level for more than a year.
• The UK unemployment rate dropped by 0.1% to 7.6% in October – its lowest level since 2009.

Japan

• Japanese GDP growth slowed by 0.5% per quarter to 1.9% per year, following growth of 1.1% and 0.9% in the first two quarters of the year. Growth was led by housing and government spending.

China

• The China Communist Party Central Committee’s Third Plenary session approved a number of significant reforms including relaxing the 30 year old one-child policy and deregulation of pricing for some utility services.
• China’s October CPI recorded its highest level since February at 3.2% per year, up from 3.1% per year in the previous month.

 

THE AUSTRALIAN DOLLAR

The Australian dollar (AUD) depreciated by 3.8% per month in November to $US0.9108 against the US dollar (USD).

Contributing factors include: mixed domestic economic data; increased efforts by the RBA Governor and Deputy Governor to ‘talk down the currency’, including market chatter about RBA currency intervention; rising anticipation of Fed ‘tapering’; and the Federal government’s decision to reject the foreign takeover of GrainCorp.

 

AUSTRALIAN SHARES

Australian shares drifted lower in November, with the S&P/ASX 200 Accumulation Index declining by 1.3%. This performance bucked the trend of rising global share markets – US equities rose to all-time record levels, for example, while the MSCI World Index climbed to a six-year high (as detailed further below).

A number of companies have completed Initial Public Offerings (IPOs) in the past few months and more new listings are scheduled to take place in December. Electronics retailer Dick Smith, travel insurer Cover-More and TV broadcaster Nine Network have all either completed Initial Public Offerings or are in the process of doing so.

 

PROPERTY

Australian listed property securities fell by 2.8% in November, underperforming the broader market.

At a stock-specific level, Commonwealth Property Office Fund (+6.3%) and Australand Property Group (+0.8%) were the strongest risers. Commonwealth Property Office Fund rose as competition for its portfolio of office assets intensified.

Listed property markets offshore fell during November, as bond yields rose and investors focussed on more economically sensitive sectors.

Overall, the UBS Global Property Investors Index (local currency) fell by 3.5%. Continental Europe (+0.3%) was the strongest-performing region, followed by Japan (+0.1%). The US and Canada (-5.3%) and Singapore (-3.6%) underperformed.

 

GLOBAL SHARES

The MSCI World Developed Markets Index increased by 1.6% in USD terms and 5.7% in AUD terms – rising to a 6-year high during the month.

The US S&P500 Index rose by 2.8% in November, reaching an all-time record high level above 1,800pts. Positive US economic data and strong September quarter company earnings results, where 69% of companies’ earnings exceeded analyst expectations.

In Japan, the Nikkei 225 Index (+9.3%) surged to a 6-year high, supported by growing market expectations for improvements in corporate earnings.

 

GLOBAL EMERGING MARKETS

The MSCI World Emerging Markets Index gave-up recent gains in November, decreasing by 1.6% in USD terms, but increasing by 2.4% in AUD terms.

Chinese shares (+3.7%), as represented by the Shanghai Composite Index, was the best performing equity market in Asia. Healthcare, industrials and utilities shares’ were boosted, in particular, by the announcement of the new leadership’s ambitious structural reform plan at the Communist Party’s Third Plenum mid-month.

The Philippines (-5.7%) equity market was dragged down by concerns over its growth outlook after Super Typhoon Haiyan hit central parts of the country early in the month. The Philippine economy grew at its slowest annual pace for more than 12 months during the September quarter at 7.0% per year, down from 7.6% per year in the previous quarter. Extensive damage from the typhoon is expected to be a further drag on the country’s economic outlook, before a likely reconstruction boost.

 

GLOBAL FIXED INTEREST

Longer dated developed market government bond yields trended higher during November, with major US macroeconomic data releases surprising on the upside.

A surprise easing of monetary policy by the ECB capped the rise in 10-year German Bund yields (+2bp to 1.69%).

Longer-dated 10-year Japanese Government Bond (JGB) yields finished the month virtually unchanged (+1bp) at 0.60%.

 

DOMESTIC FIXED INTEREST

The UBS Composite Bond Index decreased by 0.10% in November, led lower by Treasuries (-0.35%).

Australia’s benchmark 10-year CGS bond yield lifted by 19bp to 4.13% in November, tracking the sell-off in 10-year US Treasuries. The yield had reached a high of 4.34% on 21 November.

The Australian government priced its first 20-year maturity (April 2033) and the largest AUD issue ever of $A5.9 billion at a coupon of 4.50% on 19 November. The issue was oversubscribed, reflecting strong demand, supporting the steepening in the CGS yield curve.

The short-end of the curve (3-year CGS yield +4bp to 2.88%) was supported by the RBA’s very mild easing bias, suggesting a steady cash rate through to late next year.

 

Source: Colonial First State