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The US slowdown continues to be mild, with housing weakness partly offset by strength elsewhere in the economy (notably exports, partly attributable to a weak US$), leaving Q3 GDP growth more than solid at a strong 3.9% (annualised) rate. However, expectations of slower growth from the weakness in housing and disruptions in financial markets saw the US Fed funds rate cut a further 25 basis points to 4.5% at end-October.
US sub-prime mortgage market-related concerns continued to unsettle markets and credit markets are not yet back to normal. However, trading is back to normal in other financial markets, including the return of speculative activity. Overall, consensus views on the globe are continuing to strengthen, led by a strengthening Chinese outlook, as well as being reflected by gains in the price of oil and some other commodities.
With Australia’s economy now more sensitive to developments in China than those in the US, the further rise in Chinese prospects and expectations of additional increases in key commodity prices is adding to demand pressures in an already stretched economy. That has underpinned a lift in underlying inflation through 2007 to 3% which, combined with both sides of politics promising further tax cuts, saw a lift in Reserve Bank cash rates to 6.75% announced in early November.
Equity markets continue to be affected by competing forces. On the upside is a relative easing in credit conditions compared to previous months, strong corporate net assets and cash flows, and reasonably attractive valuations. On the downside, however, are rising oil prices, credit concerns, high levels of geopolitical uncertainty and relatively weaker earnings growth compared to 2006.
Overall for October, the global developed share market index increased by 2.1%. The United States S&P 500 gained 1.5%, the European Stoxx finished 2.9% up, and Japan’s Nikkei index decreased by 0.3%. Australian equities gained 2.9% but it was emerging markets indices that once again outperformed, gaining 8.8% (and 7.2% ex-Asia).
While the US dollar continued to depreciate, the Australian dollar soared trading at 23 year highs of 93 US cents (+4.9%) by the last day of the month. Expectations of a November RBA interest rate rise, a weak US$ and continuing highs in commodity and oil prices supported the A$ through the month. Amongst the major currencies, against the US dollar, the euro appreciated 1.4% but the yen fell back marginally from 114.8 to 115.3 (per US$).
The major action in commodity markets in October was seen in energy prices. The US dollar weakened coupled with contracting US oil inventories as the economy moves into its peak heating oil demand season and geopolitical unrest at the Turkey and Iraq border escalated. Oil prices increased by 15.8% in October. US$ gold prices continued to climb, up 6.3% for the month. In the base metal market, the Economist base metal index finished October 1.4% higher and overall, the CRB index of commodity prices finished the month 0.3% up.
Please note that this economic commentary does not constitute advice.
Source: Access Capital Advisers Pty.Ltd
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