Monthly Newsletter - August 2011

Editors Note

This edition includes an Inspirational Quote, a Funny Picture, Economic News and a Market Commentary.

Inspirational Quote

Risk! Risk anything! Care no more for the opinions of others, for those voices. Do the hardest thing on earth for you. Act for yourself. Face the truth.

Katherine Mansfield (Author)

Funny Picture

Here is a a different take on synchronised diving - very impressive effort!

Economic News

Recent data has confirmed a continued softening in both Australian and global economic growth. US GDP for the June quarter was 1.3% annualised, well below forecast. The US manufacturing and non-manufacturing purchasing managers’ indexes (PMI) fell from June to July, showing expanding activity but at a much slower rate. Higher consumer confidence expectations and a strong non-farm payrolls report for July provide some offset for these negative influences, nonetheless we have lowered our US GDP forecast for 2011 to 2.8% from 3.1%. In the wake of the agreement on the US debt ceiling, Standard & Poor downgraded the US long term sovereign credit rating to AA+ from AAA, focusing on the effectiveness of politicians to determine a sustainable path to managing the nation’s debt burden. The European sovereign debt situation has intensified, with the likelihood that Italy (the third largest EU member) will need to approach the European Financial Stability Facility for a bailout, notwithstanding passage of austerity measure legislation. A further agreement was reached for Greece to receive a second bailout package of 109 billion Euros from the IMF and Eurozone neighbours. After increasing interest rates in July, the European Central Bank (ECB) held rates steady in August.

Expectations for interest rates in Australia have come to diverge markedly. Financial markets have priced in the prospect of rate cuts before the end of the year, but RBA rhetoric and a stronger than expected reading on June quarter inflation have thrown some doubt in this occurring. Following the August meeting, at which the RBA Board left the cash rate unchanged at 4.75%, the RBA cut its GDP forecast for the year to December 2011 to 3.25% from 4.25%. 

The above information has been sourced from Macquarie Equities Limited. 

Market Commentary  

Shares, currency and commodity markets have all experienced significant falls during the first few weeks of the 2012 financial year.

Australian Shares

The S&P/ASX200 Accumulation Index fell 4.0% in July. The all industrials fell 4.7% and underperformed the resources sector, which fell 1.9%, reflecting the deteriorating domestic environment. Small caps (up 1.4%) delivered a positive return, overwhelmingly driven by small resources (up 6.3%) and clearly outperforming large caps (down 4.5%). The market rout in early August has driven the S&P/ASX 200 index 9.9% lower, with resources falling 11.5% and industrials down 9.1% based on 8 August closing prices. 

International Shares

International shares also fell in July, with the MSCI World Index down 4.4%  unhedged to the Australian dollar. The appreciation of the Australian dollar led to a slightly better result for the hedged index, down 2.4%. Despite a solid US company reporting season, global markets commenced a sharp correction in mid July, driven by a soft US non-farm payrolls report for June and an escalation of the European sovereign debt crisis. A host of European markets were down in excess of 5% for the month, with Italy down 8.5% in Euro terms. Emerging markets were mixed but outperformed developed markets, down 1% in local currency terms. Global equity markets have continued to fall significantly in August, with European markets down 14%, North America down 13% and the Pacific region down 8% on a local currency basis, at the close of 8 August. 

Property

Australian REITs underperformed the broad share market in July, down 6.6%, driven by retail-exposed REITs, seen as particularly vulnerable to weaker economic growth. A-REITs have fallen 8% so far in August. Global REITs (the FTSE/EPRA NAREIT Global Index) achieved a small gain of 0.6%, subsequently falling 16% in August. Unlisted, high quality direct Australian property returned 1.2% for the month of June, up 9.8% for 12 months. 

Fixed Interest

Bond markets rallied strongly in July, as European sovereign debt concerns and uncertainty over the US debt ceiling negotiations led to a significant switch out of riskier assets. Additionally, softer economic data and the potential for a US debt default saw 10-year US bond yields rally from 3.16% to 2.80%. The first week of August has seen these yields move sharply lower, to 2.56%. Australian 10-year Commonwealth bonds moved from 5.21% at 30 June, to 4.80% at 31 July and then 4.60% at 8 August. Australian corporate bonds returned 1.2% for the month of July and 1.2% for August to date. 

Cash and Currency

Australian 90 day bank bills traded in a wide range during July, rallying 10 basis points to 4.86% mid-month. This followed news on European bank stress test results, doubts around the US sovereign debt rating and lower expectations that the RBA will raise rates in the face of domestic economic weakness. Following the June quarter CPI release late in the month and amid growing European and US concerns, bill yields increased, ending the month five basis points higher at 5.01%. The Australian yield curve (the spread between 10 year bonds and 90 day bank bills) moved to an inverted position of 27 basis points as at 8 August, implying that markets have priced in lower cash rates.

Currency markets continued along their rocky road, with the Australian dollar appreciating relative to the US dollar from $US1.07 at the end of June, to $US1.10 at the end of July, subsequently falling to $US1.02 as at 8 August, following the wholesale global retrenchment of risk appetite. The US dollar fell against most major currencies in July ahead of the debt ceiling vote but has since stabilised or appreciated. Japanese authorities have stepped in to slow yen appreciation, with only moderate success before the yen weakened in the first week of August in response to a switch to the US dollar and Swiss franc, in particular.

The above information has been sourced from Macquarie Equities Limited. 

Important Information

The above information provides an overview or summary only and it shouldn’t be considered a comprehensive statement on any matter or relied upon as such. The above information doesn’t take into account your personal objectives, financial situation or needs. It’s important for you to consider these matters before making any financial decision and I recommend you seek help from a financial adviser.