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Stock markets around the world had a bout of the jitters in February. After markets started the year so positively, investors appeared to become nervous and feared that previous gains could not be maintained. The nervousness belied the fact that the economic environment continued to be very supportive with robust world growth set to continue and still low inflation allowing most central banks to keep interest rates at relatively low levels. In addition, much of the increases recorded in stock prices over the past few years has simply matched the growth in corporate earnings and equity valuations, on average, do not appear to be stretched from a medium-term perspective. Thus, while it may be too early to be definitive, the correction in February may prove to be a temporary pause in a longer-term trend increase in stock prices, just as we saw when markets last took a breather in May 2006. Most major equity markets tracked steadily upwards through most of February before the sell-off in the last two days of the month. Overall, the global developed share market index fell 1.3% in February. The global index decline was influenced primarily by US (S&P 500 down 2.2%) and European (European Stoxx down 1.6%) markets. On a domestic front, however, positive earnings results and promising merger and acquisition activity saw a net increase of 1.6% for the Australian ASX300 for February. It is interesting to observe that a quite small market on a global scale, the still developing Chinese stock market, triggered the sell-off globally. Presumably, investors feared that a weaker Chinese market would be a signal of slower economic growth in China which could compromise the strong global economic growth story. At this point, such fears appear to be unfounded; to the contrary, the Chinese authorities continue to be more exercised by trying to restrain rampant domestic demand rather than any prospect of a weakening in the economy. Lower oil prices and continued moderation in labour costs in most centres have contributed to moderating headline and, to a lesser extent, core inflation risks on a global scale. Consequently, central banks have revised down inflation expectations and assumed less urgency in their consideration of future adjustments to official interest rates. Australia may be an exception with RBA Governor Stevens stressing that the RBA was maintaining its tightening bias. The improved outlook for inflation also led to a modest rally in global bond markets. In Australia’s case, 10-year bond yields fell 25 basis points in February, finishing at a 2½ month low of 5.69%. The first two months of 2007 continued last year’s profile of high volatility in metal prices. Significant falls in key prices in January have subsequently been reversed through February, in part due to production disruptions. In turn, speculative investors jumped at the opportunity to ride the commodity price high until market forces stabilise. Higher commodity prices and the differential between Australian interest rates and those in most overseas markets lent support to the Australian dollar. Over February, the Australian dollar appreciated by 1.5% against the US dollar and by 1.3% on a trade-weighted basis. Source: Access Economics Pty Limited Disclaimer |
