Sydney, Australia (PressExposure) August 04, 2009 -- Headlines of the past week
1. RBA Governor remains upbeat Comments by RBA Governor, Glenn Stevens, last week hinted strongly that the Australian economy will avoid one of its worst downturns in the post-war era. Speaking on 'The Challenges for Economic Policy', Stevens believes there are now enough positives in the economy to balance out the negatives. He did, however, concede that it would be a mistake to lapse into the comfortable assumption that easy prosperity will soon come our way.
The market's reaction to the comments was to bet that interest rates will rise by more than 1.00% over the next 12 months, with a full 0.25% cut now expected by February 2010.
2. US economic conditions improving The US Federal Reserve's latest Beige Book survey, which gathers anecdotal evidence on current economic conditions, indicated a slower pace of contraction in June and July. The outcome suggests that the worst decline in the US economy in more than fifty years is nearing an end.
3. Wall St. pays US$175b in bonuses A report by New York Attorney General, Andrew Cuomo, has revealed that nine US banks, including Citigroup and Merrill Lynch, paid US$32.6 billion in bonuses in 2008 while receiving US$175 billion in government bailout money. The worst offenders, though, were JP Morgan, Goldman Sachs and Morgan Stanley. They received a combined total of US$45 billion in taxpayer funding last year yet still paid bonuses of more than US$18 billion.
What to watch next week
In Australia, the RBA will meet on Tuesday to discuss interest rates. In the wake of Governor Stevensâ upbeat comments about the Australian economy, we expect the Bank to leave the official cash rate unchanged at 3.00%.
In the US, the June quarter reporting season will continue with another 89 companies due to announce their results. In addition, the latest round of jobs data is expected to show a jump in the unemployment rate to 9.6%.
Elsewhere, interest rates are expected to remain on hold when the Bank of England (0.50%) and the European Central Bank (1.00%) meet on Thursday.
Key market performance
1. Australia The Australian share market continued to advance, gaining a further 3.7% over the week on the back of Governor Stevens' comments and a series of better-than-expected economic data. Higher commodity prices also contributed to the gains.
The Australian All Ordinaries Index now stands at its highest level since last November.
2. US Wall Street managed only modest gains over the week despite the latest round of GDP figures showing that the US economy contracted by less-than-expected in the June quarter.
3. Euro-zone In Europe, markets ended the week 2.1% higher after a number of companies, including Bayer and British Telecom, posted June quarter earnings that beat analystsâ expectations. A fall in the German unemployment rate (Germany is the regionâs largest economy) also contributed to the gains.
4. Japan The Japanese share market had a very good week, closing 4.1% higher on the back of rising industrial production and news that Honda Motors' latest profit target had increased sevenfold.
Oil prices were again higher thanks to stronger share markets and a weaker US dollar (US$). Oil closed the week up 2.1% and is 56% higher so far this year.
Gold ended the week unchanged after some weaker-than-expected data in the US offset continued weakness in the US currency.
The Australian dollar made further gains against the US$ as the latter continued to weaken and commodity prices rallied. Our currency has outperformed all but two of the 16 most-traded currencies versus the US$ this year, outpaced only by the Brazilian real and South African rand.
Outlook for markets
At BT Financial, we believe the Australian economy is currently in the midst of a moderate recession and we expect this will continue into next year. Whilst economic data is expected to deteriorate in the near-term, we don't see this as a reflection of financial markets. Itâs our view that we've seen the worst of the current downturn and that global markets will recover quickly.
The Australian dollar has rallied strongly in recent months and there remains a good chance that it could yet hit US$0.85 cents by year's end. Given the turnaround in share markets since March, there is growing confidence that we've seen the bottom of the latest bear market. Whilst we believe this to be true, we still expect share markets to remain volatile in the months ahead.
Shares are currently trading at historically low levels and we believe they represent good value for investors with a long-term investment horizon...