News: Economic and Market Summary: January 2007

Prime Super Investment Review January 2007

The global economy provided a favourable environment for equity markets in 2006, a trend which followed through to the early part of 2007.  All regions of the globe are now enjoying a period of robust economic growth with generally stable inflation and low interest rates. 

Headline inflation risks have moderated in all major economies in recent months.  Consequently, central banks have revised down inflation expectations and modified their public statements to use terms such as ‘moderating pressures’ (the Fed) and ‘close monitoring’ instead of ‘vigilance’ (ECB).  Consequently, investors have pushed out the timing of any expected tightening moves.

Australian CPI inflation for the December quarter (0.5%) was lower than anticipated, triggering a rally in the Australian long term bond market.  However, the data’s influence was short lived with investor activity largely driven by US bond market movements over the month.  Overall Australian bond yields rose steadily but slowly through January, finishing at a 2½ year high of 5.94%.  Indeed, bond yields worldwide trended steadily higher over January.
The combination of stable inflation and strong economic growth supported share markets in January.  Combined with a high levels of merger and acquisition activity, the favourable economic conditions resulted in the overall developed share market index increasing 1.7% in January.  The increases were spread quite evenly throughout the major centres with the US S&P500 up 1.4%, the Japanese Nikkei up 0.9%, the Australian ASX300 up 1.9% and the European Stoxx index up 2.0%. 

In contrast, after a year of very strong gains through 2006, the index for global emerging markets corrected slightly in January, falling 0.5%.
A distinguishing feature of financial markets over the recent years has been the elevated commodity prices.  These influenced share prices and currency markets alike throughout 2006.  In January, there were tentative signs that commodity prices may be started to pull back from their very high levels.  For example, the price of oil, copper and zinc all appear to be past their peaks.  As a result, the CRB (-0.7%) and Economist (-0.9%) commodity indices both fell in January.

The more mixed picture for commodities and the prospect of lower inflation allowing the Reserve Bank to leave interest rates on hold meant that the Australian dollar fell against most major currencies in January, depreciating 1.6% against the US dollar, 0.3% against the Euro, and 1.8% against the Pound Sterling.  On a trade weighted basis, the Aussie dollar fell 1.7%.

Source: Access Economics Pty Limited

Disclaimer
This article provides general information only and may not be relied on as legal or financial advice.
Prime Super is a Regulated Superannuation Fund issued by Farm Plan Pty Limited ABN 81 067 241 016, AFSL 219723.  A Product Disclosure statement can be obtained from the issuer and should be considered before deciding whether to acquire, hold or dispose of an interest in the Fund.