Monthly Financial Markets Update – October 2014

While the US economy remains robust, Australian shares fell 5.4% as markets digested falling commodity prices, a weaker Aussie dollar and the possible introduction of policy brakes on housing credit, as James Wright, JBWere Chief Investment Officer reports.

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Global equities, as represented by the MSCI World Equity Index, closed marginally lower in local currency terms (-1%) in September.

Geopolitical tensions with Russia continued and several Western countries began limited military action against ISIS, causing investor uncertainty.

The United States equities market, as represented by the S&P 500 index, finished 1.4% down for the month. However, the US economy remains robust with continued strength in the purchasing manager surveys and strong durable goods orders. Housing data was mixed: existing home sales were weaker but off-set by new home sales which hit a new recovery high. This has strengthened the Fed’s resolve to continue its tapering program and expectations of rising interest rates are becoming more prevalent.

Chinese data was generally soft which impacted commodity prices, especially the iron ore price which is down 40% year-to-date to below US$80 a tonne.

Australian equities market

The Australian equities market, as represented by the S&P/ASX 200, fell 5.4% in September – the largest loss since May 2012. Several factors triggered the sell-off including prospects of higher capital requirements by the banks, the possible introduction of policies to limit housing credit and price growth, falling commodity prices and a weaker Australian Dollar. These factors had the biggest impact on two of Australia’s largest equity market sectors, Financials and Materials, which fell 6.5% and 6.4% respectively.

Australian Dollar

After months of trading in a tight range between US$0.92 and US$0.94, the Australian Dollar declined 6.3% in September to US$0.87. A key reason was falling commodity prices, particularly iron ore. The sharp Australian equities market fall has also seen foreign investors reduce their exposure to our market, selling the currency.

Australian residential property

Australian capital city house prices were flat in September, with a 0.1% rise for the month and 2.9% rise for the quarter, according to the RP Data-Rismark Hedonic Home Value Indices. Prices in Sydney, Brisbane and Adelaide were 0.7 – 0.9% higher, while prices in the other capitals fell 0.3 – 1.0%. Annual house price growth has also been trending lower since April, which may provide some relief for the Reserve Bank of Australia, which is concerned about strong price rises and investor-driven demand in Sydney and Melbourne. In its recent Financial Stability Review, the RBA stated that “the composition of housing and mortgage markets is becoming unbalanced, with new lending to investors being out of proportion to rental housing’s share of the housing stock”.

While reasons for the strong Sydney and Melbourne house prices include low interest rates and investor-driven demand, other reasons include the under-supply of new dwellings to keep pace with household formation and net immigration, and the possible illegal purchases of residential property by foreign investors. With the strong rise in building approvals, slower immigration and a possible crackdown on illegal foreign buying, some price pressures may soon ease.

For further analysis, download the full report:

Monthly Financial Markets Update, October 2014 (PDF, 633kB)