June 10, 2015

Monthly Financial Markets Update – June, 2015

The US Federal Reserve expects the US unemployment rate will fall to 5% by year end. Locally, the Reserve Bank of Australia is hoping lower interest rates will translate to a lower Australian dollar which would help the non-mining sectors.

Welcome to our June monthly market update.

 So what happened in the major economies in May?

In a repeat of 2014, the US economy contracted in the first three months of the year. The second estimate of GDP growth showed the US economy contracted 0.7% on an annualised basis in the first quarter. Other data, such as the resurgence in home building, seems to suggest the US economy is improving. However, soft consumer spending figures and slowing jobs growth casts doubts about an economic bounce back. US Federal Reserve Chairperson, Janet Yellen recently said the Fed believes the recent soft data was based on transitory factors. It expects that the economy will continue to improve over the rest of this year with the unemployment rate falling to close to 5% by year-end. The Fed also expects that the economy will be strong enough for it to begin to lift interest rates this year, but with the pace of rate rises relatively gradual.

In Europe, negotiations between Greece and its largest creditors over debt reduction and government funding continued during May without resolution. Meanwhile, Euro area GDP grew 0.4% quarter-on-quarter in the March quarter, which was the strongest quarterly growth since mid-2011. In the UK, April’s headline inflation rate was the weakest in more than 50 years, declining to -0.1% year-on-year, while the unemployment rate fell from 5.6% in January to 5.5% in March.

Chinese data has continued to be relatively soft. Recent trade and manufacturing figures were disappointing while fixed asset investment slowed to 12% year-on-year, the weakest growth for more than a decade. Against this weaker backdrop, the People’s Bank of China has continued to try to stimulate growth and in May it cut one-year lending rates by another 25 basis points (or 0.25%) to 5.1% per annum.

What about the Australian economy?

The Reserve Bank of Australia cut official interest rates by 25 basis points for the second time in 2015, from 2.25% to 2% per annum. The Reserve Bank of Australia (RBA) appearsconcerned that theAustralian economy is operating below capacity and that the non-mining parts of the economy need further stimulus. The RBA is also hoping that lower interest rates translate into a lower Australian Dollar. These concerns looked to be justified following release of the first quarter capital expenditure report in late May. Not only is investment in the mining sector falling faster than expected but non-mining investment intentions are also very weak, suggesting Australian economic growth may be slower for longer.

In residential property, Australian capital city dwelling prices fell 0.9% in May, the first monthly decline since November 2014. Over the past year, capital city dwelling prices are 9% higher, largely as a result of strong gains in Sydney (15%) followed by Melbourne (9%), however, outside these capital cities, price growth has been more moderate, ranging from -1% to +3.4%.

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

Global equities returned 1.4% in May, with the US market gaining 1.3% to make fresh highs during the month. Emerging markets shares lost 2.5% but Chinese shares finished 3.8% higher.

Australian shares rose 0.4% in May. Share prices of Australian banks fell another 3% while larger industrial shares rose nearly 6% as investors rotated out of banks and resources.