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The month of August saw an easing in oil prices and greater confidence that the US interest rate cycle might be coming to an end as US interest rates remained on hold at 5.25%. Following several months of weak returns in equity markets, the MSCI World ex-Australia Index (unhedged) rose by 3.0% in August whilst the MSCI World ex-Australia (hedged into the $A) rose by 2.5%. Australian equities as measured by the S&P/ASX 200 were up by 3.3% over the month.
The Australian economy performed strongly over the month. Unemployment has dropped to a new 30 year low of 4.8%. The RBA has forecasted GDP growth for the coming 12 months to be around 3.5% and underlying inflation is expected to remain at the top end of the RBA’s target range of 2.0-3.0%. These figures, along with strong retail sales, business capital spending and credit growth have brought about the market expectation of a further interest rate rise before 2006 comes to an end. However, the market is approaching this view with come caution as August witnessed a sharp drop in consumer confidence. The S&P/ASX 200 was up 3.3% during the month. The best performing sectors were Consumer Staples (up 10.5%) and Utilities (up 4.5%). The worst performing sectors were Energy (down 4.3%) and Telecommunications (down 3.9%).
In the US, there are some strong concerns surrounding the US housing market and its potential to further slow down the US economy, which precipitated the halt in tightening monetary policy. The European Central Bank however increased their cash rate from 2.75% to 3.00% and expectations are that a further rate rise will be announced by the end of 2006.
A fall in business confidence in Germany has circulated some fears that Europe may experience a slowdown over the coming year. Weak inflation figures out of Japan have confirmed expectations that any rate rises by the Bank of Japan will be very gradual as the fundamentals are still not overwhelmingly strong. The Chinese central bank raised interest rates in August in a continued effort to keep growth under control.
The Australian bond market experienced a rise in yields for the first half of August which was subsequently reversed. Ten year government bond yields fell to 5.67% from their July level of 5.84%. Domestic fixed interest returns, as measured by the UBSA Composite Bond Index, recorded a return of 1.06% for the month. Internationally, bond yields fell during the month, driven in part by the US Fed’s decision to keep rates on hold. Returns for global fixed interest were modest, with the Lehman Global Aggregate Index (Hedged) returning 1.67%.
The Australian listed property sector produced a solid result over August with the S&P ASX 200 Property Accumulation Index returning 3.8%. In unlisted property, total returns are at their highest levels since the property boom of the late 1980’s. The main driver has been the retail sector which has been performing strongly despite falling consumer confidence and weaker spending figures.
Please note that this economic commentary does not constitute advice.
Source: Watson Wyatt Investment Consulting
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