Monthly Financial Markets Update – March, 2015
A February interest rate cut and a strong company reporting season buoyed the Australian share market while overseas, resolution of Greek debt negotiations and continuing monetary stimulus, benefited developed global markets.
Global equities markets rose a healthy 5.9% in February, buoyed by the resolution of Greek debt negotiations. The US and German equities markets reached fresh record highs while bond yields in many countries are at or close to record lows.
US economic data released in February showed US employment continues to grow strongly with 257,000 jobs created in January. There was also an upward revision of 147,000 jobs added to previous months. Not only were more jobs created than expected, average hourly earnings were also higher than expected, which should benefit consumer spending.
European markets were largely focused on the stand-off between Greece and the European Union – with Greece needing more money to avoid a debt default. In the end, a last minute temporary deal was agreed, which will extend the current debt program by four months.
European GDP growth for the fourth quarter 2014 was stronger than expected mainly due to Germany. The German economy grew 0.7% in the fourth quarter despite Russian sanctions which impacted exports. During February, the German government issued 3.3 billion Euros of five-year bonds at a yield of -0.08%; the first time ever it has sold five-year bonds at a negative rate. This means investors are paying the German government to look after their money for five years. About 30% of European sovereign bonds are now trading on a negative yield, reflecting market fears about deflation.
In China, in February, the People’s Bank of China cut its benchmark one-year lending rate by 0.25% to 5.35% and reduced the ratio of cash reserves Chinese banks must hold. This was designed to try to stimulate growth after the release of weak Chinese inflation and exports results.
What about the Australian economy and share market?
In Australia, unemployment hit a 12 and a half year high of 6.4% with 12,200 jobs lost in January, higher than expected. The growth in unemployment is reflecting our economy’s failure to create enough jobs to absorb new workers, such as migrants and graduates. This is a better situation than one where unemployment is rising sharply due to large job lay-offs.
At its March Board meeting, the Reserve Bank of Australia surprised financial markets by leaving interest rates unchanged, rather than following February’s rate cut with another one. We expect another rate cut in May, and the language from the RBA is that they are certainly open to cutting official interest rates even further in coming months.
Australian shares rose 6.9%, boosted by the interest rate cut in early February and a bounce in resources stocks, which rose nearly 12%.
The Australian Dollar moved slightly higher in February opening the month at US$0.7788 and closing at US$0.7828.
Many currency strategists are suggesting that the large falls in the Australian Dollar – US Dollar exchange rate are behind us and that the currency will consolidate at current levels.
Australian capital city dwelling prices rose 0.3% in February led by Sydney where prices rose 1.4% for the month. Over the past year, capital city prices are 8.3% higher, with the highest gains in Sydney (13.7%) followed by Melbourne (7.4%) and Brisbane (5.9%).