Monthly Financial Markets Update – September 2015

Chinese economic data has been weak, causing significant weakness in global equity markets In Australia, second quarter economic growth was lack lustre and there was a surprise fall in retail sales, but other measures of economic activity such as building approvals and employment look good.

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Welcome to our September monthly market update.

So what happened in the major economies in August?

In the United States, economic data continues to be reasonably good. GDP growth for the second quarter was revised up, from 2.3% to 3.7% annualised, while unemployment fell from 5.3% to 5.1%. The level of jobs growth is consistent with the US Federal Reserve’s desire to see further improvements in the labour market before it raises interest rates. Despite the stronger economic performance, the Fed’s decision to begin normalising interest rates this month will depend on how it views volatility in financial markets and slower Chinese growth.

The European economy has continued to slowly improve, assisted by the European Central Bank’s 1.1 trillion Euro bond buying program – which is likely to run until this time next year. Eurozone GDP growth was 1.2% year-on-year in the second quarter, a little weaker than expected, but unemployment has begun to fall, with the most recent rate at 10.9%. Earlier fears about price deflation have been avoided, with the core inflation rate running at about 1.0% year-on-year.

Recent Chinese economic data has been weak, causing significant weakness in global equity markets. Firstly, the survey of small-to-medium-sized manufacturing firms saw the Purchasing Managers’ Index fall to 47.3, the weakest level since the global financial crisis. Growth in industrial production was also disappointing, slowing to just 6.0% year-on-year in July, down from 6.8% year-on-year in June. And, exports in July fell 8.3% compared with year-ago levels. This softness prompted the People’s Bank of China to cut interest rates and bank reserve requirements again. The Bank also adjusted the exchange rate setting regime allowing the Chinese Yuan to decline by 1.9%, the largest single day move in 20 years.

What about the Australian economy?

Australian economic growth in the second quarter was surprisingly weak, with quarterly growth of just 0.2%, or 2.0% year-on-year. Also disappointing for economists was the surprise fall in July’s retail sales, which fell by 0.1% while June’s figures were revised down from 0.7% to 0.6%. However, other measures of economic activity such as building approvals and employment have been reasonably good. There’s also evidence that the non-mining parts of the economy are picking up, assisted by low interest rates and a weaker currency. At the August board meeting, the Reserve Bank of Australia kept interest rates unchanged. We believe it has finished cutting interest rates for this business cycle and expect the next move will be a rate rise in late 2016.

Over the past year, capital city house prices are 10.2% higher, driven by strong gains in Sydney (+17.6%) followed by Melbourne (+10.6%), however, outside these capital cities, price growth has been more moderate.

So, how did global and local financial markets perform?

Global equities lost 6.6% in local currency terms, and Australian shares fell 7.8% in August amid concerns about China and potential interest rate rises in the US. Government bond yields in the US, UK and Germany were higher in August, leading to a small decline in international bond indices, however, bond yields in Australia fell and the local bond index rose 0.6%. On currency markets, the US Dollar was weaker against the Euro and Yen, but strengthened against the British Pound. The Australian Dollar continued to fall against the US Dollar, down from 73.44 US cents at the start of the month, to 70.90 at month-end.