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Investment Commentary
5 September 2011
Quick Overview
Investment market sentiment in September was dominated by escalating fears of sovereign debt default in Europe and concerns that this would spark large losses within the European banking system. Also weighing on sentiment were fears that the global economic outlook was worsening, which was highlighted by the International Monetary Fund (IMF) downgrading its global growth expectations for 2011 and 2012. In this environment, growth assets such as shares and base metal commodities declined. Defensive assets, such as government bonds, strengthened. Gold prices retreated, despite its safe haven status, after having reached a new record high of US$1920 near the beginning of September. The Australian Dollar recorded broad-based losses against most major currencies.
Key Developments
The Reserve Bank of Australia (RBA) left the official cash rate unchanged, and in a statement noted that although rising inflation was a concern, weakness in the global economy might ultimately assist with containing domestic inflation. The rise in inflation expectations and wages growth will be closely monitored by the RBA and weighed against the heightened global macro risks in Europe and the United States, which have the potential to drag down growth in Australia.
Economic news was generally weak over the month. The few positive economic reports were generally overshadowed by poor sentiment about global developments, especially in Europe. Positive news included the unexpectedly strong rebound in GDP, which rose 1.2% in the June quarter, driven by the recovery in iron ore and coal production from weather-related losses last summer. Retail sales also rose unexpectedly. On the negative side, the housing sector continued to show weakness with house prices and home loans stagnant, and building approvals declining. The business conditions survey reported another quarter of weakness as well as deteriorating business expectations over the last six months.
Interest rate markets have taken the view that the ongoing weakness in the Australian manufacturing, tourism, retail, and housing sectors; together with global financial concerns will prompt the RBA to reduce rates before year end. Yields on government bonds are now trading below the cash rate.
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