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Market and economic overview
The Reserve Bank of Australia (RBA) held the cash rate steady at 2.5% at its 3 June 2014 meeting. There was no change to the Board’s neutral policy ‘guidance’ and signal that there is likely to be “a period of stability in interest rates”.
The RBA continues to see moderate growth in consumer demand and strong expansion in housing construction. The RBA remains watchful as signs emerge of an improvement in investment intentions in non-mining sectors, but cautious as these plans are only tentative.
The RBA has acknowledged that earlier falls in the Australian dollar were assisting in achieving balanced growth in the economy, but recent gains had made this assistance less than previously thought.
Australia’s Q1 14 GDP rose by 1.1%. This took the annual economic growth rate up from 2.7% to 3.5%, the fastest pace of growth since mid-2012. The major source of growth in the quarter was net exports, which contributed 1.4%pts, following a strong increase in mining exports over the quarter.
Employment fell by 4,800 in May, the first fall since December 2013. Despite this, so far in 2014 97,900 jobs have been added to the Australian economy – with these all full-time positions. The unemployment rate held steady at 5.8% in the month, while the participation rate fell from 64.7% to 64.6%.
Q1 14 GDP growth was revised down sharply for the second time, from -1% on an annualised quarter-on-quarter basis, to -2.9%, the largest single revision since 1976. The downward revision was almost all due to revision in healthcare spending.
Inflation accelerated in May, rising 0.4% to 2.1% per year, the highest reading since October 2012. The Fed’s preferred measure of inflation, PCE Index rose 0.2% per month and is up 1.8% per year and suggests inflation has bottomed in the US.
The European Central Bank (ECB) cut all three of its key interest rates in a widely expected move at its 5 June meeting. The ECB lowered its main refinancing rate from 0.25% to 0.15% and in a historic move lowered its deposit rate into negative territory at -0.1%. The Marginal Lending Facility rate was lowered to 0.4% from 0.75%. It is unlikely any further rate cuts will occur with ECB President, Mario Draghi saying that rates are now at the lower bound.
In the biggest surprise, the ECB announced a more generous Targeted Long Term Refinancing Operation (TLTRO). Banks will initially be able to borrow up to 7% of their current loan book to corporates and households (ex-mortgages), currently estimated at €400bn, as long as net lending to the real economy improves between now and April 2016. Banks will be able to borrow these funds over four-years at 0.25%.
The Bank of England (BoE) left policy unchanged at its 5 June 2014 meeting, as expected. The Bank Rate was unchanged at 0.5% and the stock of asset purchases remained at £375bn.
There were several comments from Governor Mark Carney relating to the timing of the first rate hike. At this stage, the timing of interest rate rises will be determined by the “evolution of the economy” but the appropriate path for rate hikes will be gradual and limited. Recent comments has led to some forecasters expected the first rate hike earlier than before, now in late 2014.
The unemployment rate dropped to 6.6% in the three months to April, as 345,000 jobs were added.
The Bank of Japan’s (BoJ) policy board convened on 13 June and decided by unanimous vote to leave current monetary policy settings unchanged. The BoJ will continue to carry out money market operations so that the monetary base increases by around ¥60-70trn a year.
Prime Minister Abe officially announced Japan’s new growth strategy on 24 June. This new strategy aims to achieve growth by focussing on three areas; (1) Active participation of women in the workplace, (2) Agriculture, and (3) Medical and nursing care services.
The Australian dollar (AUD) rose by 1.3% to finish June at $US0.9433. The AUD rose steadily through the month, aided by stronger Australian GDP data, improving data out of China and no policy changes at the US Federal Reserve.
Source: Bloomerg as at 30 June 2014. Past performance is not an indication of future performance.
Commodity prices were mixed in June, with some soft commodities experiencing sharper falls. Both wheat (-10.0%) and corn (-7.0%) fell. Wheat had reached a 12 month high in May, but eased over the month as concerns about supply from the Ukraine eased. Corn prices declined on the back of strong supply. The US Department of Agriculture reported corn stockpiles were 39% higher than a year earlier.
Energy prices were mixed, with US natural gas prices falling (-1.6%), while the crude oil prices rose 2.7% on geo-political tensions in the Middle East. There was a spill-over of unrest from Syria to Iraq leading to supply concerns.
Metals prices were mixed. Gold rose (+6.2%), assisted by rising inflation in the US and a weaker US dollar. Zinc rose (+7.9%) on concerns over supply with mine closures, lead increased (+3.7%) and copper (+2.5%) also rose. Nickel fell 1.1% after recent strong gains.
IRON ORE PRICE STABLISES AFTER BETTER CHINA ECONOMIC DATA
The iron ore price traded with volatility over June, but finished the month up 2.2% at $US93.8 per dry metric ton. The iron ore price did fall as low as $US89.0 mid-month before rising towards month end on improved China economic data.
GOLD ROSE IN JUNE
Australian shares lost ground in the final month of FY14, with the S&P/ASX 200 Accumulation Index declining 1.5%. FY14 as a whole was another good one for the domestic share market, however, with the Index adding 17.4%.
In the Energy sector, Shell announced it is selling down its 23% stake in Western Australia-based oil and gas company Woodside Petroleum. Nearly half of the shareholding was sold to institutional shareholders at a small discount during June.
The Australian listed property sector increased by 3.3% in June, supported by a third consecutive monthly decline in government bond yields. The retail sub-sector performed most strongly.
Global developed equity markets recorded mixed gains in June, with US markets continuing to reach record highs, while European markets were mixed.
US markets were boosted by limited news out of the Federal Reserve and expectations that any moves in interest rates would be gradual.
The MSCI World Developed Markets Index increased by 1.7% in USD terms and 0.3% in AUD terms over the month.
The US S&P500 Index rose by 1.9% in June and has risen 22.0% over the 2013/14 financial year. The Nasdaq Index (+3.9%) while the Dow Jones rose a 0.7%.
Equity markets in Europe retreated despite the additional measures announced by the ECB in early June, although European markets had rallied prior to the announcement. Germany’s DAX (-1.1%) and France’s CAC Index (-2.1%) fell. Spain’s IBEX Index (+1.2%) outperformed.
The Japanese Nikkei 225 (+3.6%) and Topix (+5.1%) Indices both rose.
Global emerging markets
Emerging market (EM) equities outperformed their developed market counterparts in June. The MSCI EM Index returned 2.3% in USD terms and 0.9% in AUD terms. Easing tensions in the Ukraine, low volatility globally and stabilizing economic data in China all helped emerging markets.
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