February was a reasonable month for global markets. A noteworthy occurrence over the month is the changed tone of Japan’s Koizumi government. It indicates the end of easy global liquidity which up until now has facilitated the tight credit spreads and easy financing of high current account deficits, including that in Australia. For the month of February, the MSCI World ex Australia Index (hedged into $A) rose 0.5%. The MSCI World ex Australia Index (unhedged) rose 1.8% over the same period and outperformed its hedged counterpart, which was a result of the Australian dollar closing down against the US dollar, the Japanese Yen and the Trade Weighted Index. The fall in the $A followed on from the release of the US Federal Reserve’s January minutes which hinted at further interest rate increases in the future. On the other hand the Australian dollar does continue to find support from high commodity prices. Within domestic markets, the S&P/ASX 200 rose 0.6% during the month.
Australian economic indicators were mostly positive in February. Consumer confidence rose, business investment posted a sharp increase and the national average house price increased in the December quarter. Westpac’s leading indicator was consistent with reasonable economic growth. On a slightly negative note, employment was close to flat in January and unemployment rose to 5.3%. The Reserve Bank of Australia (RBA) kept interest rates on hold at 5.5% for the eleventh consecutive month, consistent with low levels of housing activity and consumer spending, a cooling labour market and steady inflation. Within the Australian market, the S&P/ASX 200 was reasonably flat in February, rising by 0.6%. Fuelled by a strong performance by CSL, Healthcare was the strongest performing sector over February (up 7.2%). Also performing strongly was Utilities (up 5.4%). Energy (down 8.1%) and Materials (down 4.6%) were the worst performing sectors. |
Globally, US data releases were mostly positive over the month, for instance unemployment claims fell, retail sales increased and housing construction starts and permits improved. Underlying inflation is still not a threat at around 2.1% year-on-year. However declining mortgage applications and a weak homebuilder’s survey suggests growth in the US housing market will slow down. Also, consumer confidence dropped in January to its lowest level in three months. Euro-zone GDP growth slowed to 0.3% in the December quarter, however business surveys suggest that growth is likely to improve. Increased business confidence in France and Germany further suggests an improvement. The Japanese recovery is progressing – GDP growth was 1.4% in the December quarter. A major contributor to this was growth in private domestic demand. However as the economy is strengthening the Bank of Japan is expected to tighten monetary policy, by 50 to 75 basis points initially. Largely as a consequence, Japanese shares have produced a flat result so far this year. Meanwhile, Chinese inflation remains very low at 1.9% year-on-year, indicating Chinese economic growth can steadily continue.
Australian fixed interest recovered during the month and returned 0.6% as measured by the UBSA Composite All Maturities Bond Index. RBA Governor Ian Macfarlane repeated the RBA’s propensity to tighten monetary policy but this had little effect on financial markets. Global bond yields continued to rise, this time due to higher interest rate expectations. This led to a 0.4% return for global fixed interest, as measured by the Lehman Global Aggregate Bond Indexs. (hedged in $A).
The Australian listed property sector posted a strong performance during the month, with the S&P /ASX 200 Property Accumulation Index rising 3.5%. The unlisted property market showed little change over the month. |
