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Forecasts for global economic growth continued to edge higher in May, thereby both supporting equity prices and tilting monetary policy a little towards further tightening. The combination of the two has resulted in bond yields in all centres rising over the past three months from what have been very low levels. Of particular note has been the shift in the market’s expectation of the future course of US monetary policy. Until quite recently, up to two rate cuts were priced into the futures curve by the start of 2008. The curve now is very flat, with investors judging that the Fed is unlikely to shift rates at all this year. The change in sentiment appears to reflect the view that the downside risks to the US economy are contained, the weaker US dollar adds to inflationary pressures and Fed Governor Bernanke may indeed be more of a hawk than Greenspan. In Australia, the low March quarter inflation figure and recent wages data paved the way for a dovish tone in the Reserve Bank’s quarterly statement. The RBA recognised a “moderation in core prices” of domestic outputs and, as a result, has lowered its inflation forecast, implying that the current official interest rate of 6.25% may be on hold for the next few months at least. Global share markets continue to gain strength from corporate M&A deals and low long-term interest rates. Overall for May, the global developed share market index returned 3.0%. The United States S&P 500 gained 3.3%, the European Stoxx was up 3.0%, the Australian ASX 300 increased 2.6%, while Japan’s Nikkei index increased 2.7%. Share prices in emerging markets continued to perform well, up 3.7% for the month. Commodity prices continue to be buoyed by the strong global economy. Production has been increasing, but is still struggling to keep pace with the growth in demand from, especially, China. Led by nickel and copper prices, the Economist’s base metal index rose 12.2% over the past three months. This has been the major factor behind the Australian dollar rising to a 17 year high against the US dollar (around 84 cents), and a 22 year high on a trade-weighted basis. The A$ appreciated 0.8% against the Euro, 1.1% against the Yen and 0.5% against the Sterling. However, the local currency depreciated marginally against the US$ (-0.3%), driven mainly by revised US interest rate expectations. Overall, the Australian Trade Weighted Index was unchanged for the month.Source: Access Capital Advisers Pty.Ltd This article provides general information only and may not be relied on as legal or financial advice. |
