Market and Economic Overview

Australia

As widely expected, the Reserve Bank of Australia (RBA) eased monetary policy by a further 25 basis points (bps) in August. The cash rate is now 2.5%, the lowest since the establishment of the RBA in 1958/59.

Economic data released in August was mixed with employment decreasing by 10,200 in July. However, the unemployment rate remained steady at 5.7% as less people looked for work.

The Westpac consumer confidence index rose by 3.5% in August. The survey was conducted over the week when the RBA cut its policy rate and Prime Minister Kevin Rudd confirmed a 7 September 2013 Federal election.

Retail sales were flat in June, up by a very modest 1.1% over the past year.

United States

US economic data was mixed. June quarter 2013 GDP expanded at an annualised pace of 2.5%, supported by surging housing investment (+13.4%/year).

The July US employment report was weaker-than-expected and the headline Consumer Price Index (CPI) rose by 0.2%/month to 2.0%/year in July – a third consecutive monthly increase.

Core retail sales (ex-autos, gas & building materials) increased by 0.5% in July – its largest gain in seven months.

Europe

The European Central Bank (ECB) kept its benchmark interest rate at 0.5% at its August meeting.

The Eurozone finally emerged from its six quarter recession. GDP grew by 0.3% in the June quarter (-0.7%/year). Growth was driven predominantly by Germany (+0.7%) and France (+0.5%), partially offset by declines in Italy (-0.2%) and Spain (-0.1%).

United Kingdom

The BoE Bank Rate is unlikely to increase from its current level of 0.5% until the unemployment rate reaches 7.0% (currently at 7.8%).

Japan

Bank of Japan Governor Haruhiko Kuroda stated that the Central Bank’s policy measures were having their desired positive effect at the annual global banking summit in Jackson Hole.

China

The official China August PMI increased to 51.0 in August as overseas demand and new orders jumped. Recent economic data releases have signalled more solid growth momentum in China.

AUD and Commodities

The Australian dollar (AUD) depreciated by 0.7% to $US0.8901 against the US dollar (USD) in August.

The AUD was supported by positive Chinese economic data flow, despite another RBA rate cut and continued anticipation of the Fed’s ‘tapering’ of asset purchases.

Commodities performed well in August, led by Iron Ore (+6.0%) as Chinese steel output remained robust. The iron ore price climbed to $US142.80/tonne on 14 August 2013. Oil (+2.5%) benefitted from rising tensions in Syria, while Gold (+5.3%) continued its recovery, bolstered by less Exchange Traded Fund (ETFs) selling, which slowed to its lowest level since December, due to risk aversion.

Australian Shares

The Australian sharemarket was a stand-out performer amongst its global peers in August.

The release of companies’ earnings for the period ending 30 June 2013 was the key focus for Australian investors in August.

Companies appeared to maintain a preference to return cash to shareholders rather than invest for growth – nearly half of all companies increased their dividend payments and several reported a lower level of capital expenditure.

Investors appeared to be reassured by the results – the S&P/ASX 200 Accumulation Index rose 2.5% during the month.

Listed Property

Australian listed property securities (S&P/ASX200 A-REIT Accumulation Index) dipped by 0.2% in August, underperforming the broader market by 2.7%. This was despite the 25bp interest rate reduction by the RBA.

Property securities announced their 2012/13 financial year results during the month. Numbers were broadly in-line with expectations, and management teams’ guidance for the financial year ahead was generally positive.

Global Shares

Global sharemarkets were weighed down by concerns over speculation that the Fed will begin moderating its $US85bn per month bond purchase program (QE3) from mid-September.

The MSCI World Developed Markets Index decreased by 2.3% in USD terms and 1.7% in AUD terms during August.

In the US, the S&P500 Index fell by 3.1% in August as ‘tapering’ worries, some disappointing earnings results and the prospect of US military strikes in Syria heightened investor caution.

News that the Eurozone had emerged from recession for the first time since the September quarter of 2011 failed to lift European sharemarkets.

In Japan, the Nikkei 225 and Topix Indices fell by 2.0% and 2.3%, respectively, in August.

Global and Emerging Markets

Emerging markets (‘EM’) came under intense pressure in August as ‘tapering’ speculation pushed US bond yields higher, triggering large capital outflows.

Indonesia, Brazil and Turkey were forced to raise official interest rates, as the authorities came under mounting pressure to support their weakening currencies amid rising inflationary pressures.

In China, the Shanghai Composite Index surged by 5.2%, making it the strongest performer in Asia.

The Czech Republic (+2.8%) and Poland (+4.1%) were the only two rising markets in August, boosted by the release of stronger than expected manufacturing numbers.

Brazilian (+3.7%) shares were an exception, supported by easing concerns over a slowdown in China, rising commodity prices and speculation that the weakening currency will boost Brazil’s exports. Output expanded by 1.5%/quarter, boosted by agricultural production.

 Australian Fixed Interest

The USB Composite Bond Index declined by 0.3% in August.

Longer-dated Commonwealth Government Security (CGS) bond yields trended higher during August, despite the RBA’s decision to reduce cash rate to a record low 2.5%.

 

Source: Colonial First State Investments Limited. This information is current at 11^th September 2013 but is subject to change.