Monthly Financial Markets Update – August, 2015

Global financial markets recovered in July following the debt deal in Greece and stabilisation of the Chinese stock market. Locally, the news is also good – the unemployment rate appears to have peaked while business conditions and confidence have also picked up.

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Welcome to our August monthly market update.

 So what happened in the major economies in July?

In the United States, economic data has been solid but not stellar. Second quarter economic growth came in at 2.3% annualised, which was below expectations, but the first quarter’s figures were revised up, from -0.2% to +0.6%. Turning to the most recent inflation reading, the Federal Reserve’s preferred measure rose 1.8% year-on-year in the second quarter, not far off the Fed’s 2% target. Given this backdrop, and comments from the Fed, which appears more upbeat about the US labour market, and the health of the economy, it looks likely that the Fed will begin normalising interest rates from September, with a series of gradual, measured rate rises.

Despite problems in Greece, the European economy continues to improve. Inflation has stabilised, business sentiment in Germany has held up well and the Bank of England has begun talking about lifting interest rates at year end. It also appears that Greece will avoid a debt default and remain in the Euro, at least for the time being. Negotiations on the terms of a third bailout package are expected to commence shortly. However, Greek debt levels remain unsustainable medium-to-longer term, and there’s debate between the IMF and Germany over whether some debt should be forgiven and written down.

China surprised economists by reporting that the economy grew 7% year-on-year in the June quarter. This was right in line with the government’s target growth for 2015 but there’s evidence that the economy isn’t performing as strongly as official figures suggest. The most recent survey of mid-sized manufacturers was the weakest in two years, with softness in all survey sub-components. This may be evidence of some spill-overeffects from the decline in the Chinese equity market, which has fallen further, despite government efforts to try to prop it up with a range of measures.

What about the Australian economy?

 Australian economic data has been reasonably good. Employment growth continues to exceed expectations and the unemployment rate appears to have peaked. Business conditions and confidence have picked up, and inflation has remained in the lower half of the RBA’s 2-3% target band. More recently, the Reserve Bank of Australia has appeared to be more optimistic about the economy. However, the RBA has kept rates on hold, with a mild easing bias.

 So, how did global and local financial markets perform in June?

 Global equities rose 2.5% in local currency terms, and Australian shares returned 4.4% in July, as markets recovered following the debt deal in Greece and stabilisation of the Chinese stock market. Government bond yields fell in the major markets, with the yield on the Australian 10-year government bond, down from 3.00% to 2.77% per annum. On currency markets, the Australian Dollar declined in July by more than three cents, to 73.4 US cents, and the Euro, British Pound and Yen were also weaker against the US Dollar.