Investment Commentary - June 2010

Quick Overview

Market sentiment in June was heavily influenced by fears that the global growth outlook was deteriorating.  These fears were exacerbated by weaker than expected economic news in the United States and suggestions that growth in China was decelerating, albeit from an unsustainably rapid pace.  Risk aversion and volatility remained high.  In this climate, global share markets declined, bond markets strengthened and base metal commodity prices fell.

Key Developments

Australia lost a Prime Minister in Kevin Rudd and gained another in Julia Gillard. The government immediately began negotiations with the big mining companies over a resources sector tax; and reached a resolution in early July.

The Reserve Bank of Australia (RBA) kept the cash rate unchanged at 4.50%, and noted that while conditions in Europe remained weak, growth in Asia remained quite strong.  It is unlikely that the RBA will further raise rates until greater clarity around the global growth outlook emerges.  Inflation will continue to be closely monitored given it is expected to grow at the upper end of the RBA’s tolerance.

The employment report for May was better than expected, with employment rising by 27,000, following a solid gain in the previous month.  The unemployment rate fell from 5.4% to 5.2%, which was partly assisted by a fall in the participation rate. Importantly, the composition of growth was strong, with full-time employment rising for the ninth straight month.  Job advertisements also rose in May, which is 21.7% higher than a year ago.

The latest GDP report showed that the Australian economy grew by 0.5% in the March quarter 2010, a slower pace than the previous quarter, and grew 2.7% in the twelve months to March 2010.  Looking ahead, it is widely expected that stronger terms of trade will have a positive effect on the trade balance and on growth.

Although base metal prices continued to fall, price gains were recorded for commodities of importance to Australia, such as iron ore and coal.  Gold prices further strengthened, benefitting from safe haven flows out of riskier assets.

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