Global share markets heralded a strong start to the year following the release of solid economic data and increased optimism that the US interest rate cycle is nearing its peak. The markets found strength despite sharp rises in the price of oil, which neared the record high set in late August last year. Over the month of January, the MSCI World ex-Australia Index (hedged in Australian dollar terms) rose 3.3%. The MSCI World ex-Australia Index (unhedged) rose 1.3% over the same period, underperforming its hedged counterpart mainly due to a stronger Australian dollar against the US dollar, the Japanese Yen and the Trade Weighted Index. The strength in the local currency is partially driven by high commodity prices and positive real yields, despite a narrowing nominal interest rate differential with the US.
Domestically, fears of inflation appear to have subsided with data showing inflation to be relatively benign over January. Despite hinting at a mild tightening bias last month, the Reserve Bank of Australia (RBA) has kept interest rates on hold for the tenth consecutive month. Subdued growth in housing construction was offset by strength in non-residential building approvals, which resulted in overall solid building activity. In the retail sector, consumer sentiment seems to be picking up but remains well below the level set at the beginning of last year. The unemployment rate is lingering at 5.1%, but weaker employment activity is expected for the coming months. Within the Australian share market, the S&P/ASX300 Accumulation Index reached record highs and returned 3.6% for the month, largely due to strong returns from resource stocks. Energy (up 10.1%) and Materials (up 9.4%) were the two best performing sectors, while the Healthcare (down 1.6%) and Consumer Discretionary (down 1.5%) sectors were the worst performers over the month.
Globally, the US Federal Reserve (Fed) continued its series of measured interest rate rises, taking the official Fed Funds rate to 4.50%. US retail sales rallied higher by 2.3% in January, posting their strongest gain since May 2004. |
This data comes despite evidence from December last year that the US consumer and housing markets are slowing. In Europe, economic indicators are also mixed with Euro-zone inflationary pressures building and low GDP growth of 1.3% for calendar year 2005. This lower than expected growth rate has led to uncertainty as to whether or not the European Central Bank will raise interest rates in the first quarter of 2006.Despite strong recent levels in German business confidence and signs that consumers are becoming more optimistic, data shows that the German economy slowed to near zero growth rates at the end of 2005, largely as a result of weak consumer spending. By contrast, in Asia there have been more positive economic data flowing from the markets in Japan and China. In particular, the Chinese economy is expected to continue its expansion having experienced growth of 9.9% in 2005. The buoyancy of the Chinese economy will likely be a driving force behind higher commodity prices, and continued strong returns in the resources sectors.
While domestic bond yields rose across all maturities during January, longer-term bond yields rose more sharply to produce a steeper yield curve over the month. Australian fixed interest returned 0.2% over January, as measured by the UBSA Composite All Maturities Bond Index. International bond yields also rose in response to a wave of solid global economic data, which led to flat performance by global fixed interest, as measured by the Lehman Global Aggregate Bond Index (hedged in $A).
The Australian listed property sector posted negative returns during January, with the S&P/ASX 300 Listed Property Index falling 1.2%. Conversely, the Mercer Australia Unlisted Property Index returned 0.5% for the month. |
