Market Update

Equity markets have been extremely volatile during July with daily movements of up 2% (both up and down).

The financial news continues to be dominated by Global sovereign debt issues. The European community have nearly finalised the second sovereign debt rescue package for Greece. As part of this agreement they have also looked at how they would support other European Countries that may need future support. This news was received positively by markets for the week ending 23 July 11.

Attention has now moved to the US which must finalise a federal budget package to be approved in conjunction with an increase in the US Government debt ceiling. This must be finalised by 2 August 11 to avoid a technical default on US government debt. Although this breach is unlikely to occur, the uncertainty and lack of agreement is current weighing on equity markets.

Profit reporting season in the US (for the quarter ending 30 June 11) has been slightly better than expected. The Australian profit reporting season will commence in August with results expected to be strong for resource companies, reasonable for banks and mixed for other sectors such as retail and industrial companies

 Australian shares

The Australian sharemarket weakened for a third consecutive month in June, with the S&P/ASX 200 Accumulation Index declining by 1.8%. The negative tone of macroeconomic news, both within Australia and overseas and ongoing sovereign debt concerns in the eurozone, continued to weigh on investor sentiment. In spite of the recent weakness, the market rose in value by 11.7% in the 2010/11 financial year, thanks to strong gains in late 2010 and early 2011.

Most industry sectors lost ground during the month. The energy sector was a notable laggard, as oil prices retreated and investors grew increasingly concerned about increasing costs in the sector. Woodside Petroleum announced a significant cost overrun and production delay at its Pluto-1 project off the coast of Western Australia. Stocks in the materials sector were also adversely affected by lower commodity prices.

There was a reasonable amount of news from major Australian companies in June. Telstra reached a definitive agreement with the Government regarding the development of the National Broadband Network (NBN). The company announced that it will participate in the rollout of NBN and receive around $11 billion in compensation to phase out its copper network.

Foster’s Group, which recently demerged its Treasury Wine Estates business, received a $9.5 billion takeover offer from UK-based brewer SAB Miller. This approach was rejected by the Foster’s Group Board.

Gaming company Tabcorp Holdings completed the demerger of its casino business, Echo Entertainment Group. Casino operator Crown, subsequently announced a 4.9% stake in both Tabcorp Holdings and Echo Entertainment Group.

Most listed Australian companies will report their earnings for the 2010/11 financial year in August and anticipation of these releases is now dominating investor attention. The impact of slowing economic activity and the repercussions of the Australian dollar’s strength are expected to have restricted earnings growth for a number of companies.

Global shares

Global equity markets fell in June on escalation of Greek sovereign risk concerns and weaker economic data. The MSCI World Net Index fell 1.7% in US$ terms and 2.2% in A$ terms, due to a gain in the Australian dollar over June.

US equity markets fell on Greek sovereign debt concerns and weaker economic data from the US. This is despite some decent company news, including Nike who beat analyst earnings expectations. All eyes will now be on second quarter earnings results which begin on July 11 with Alcoa. The Dow Jones Index fell 1.2%, the S&P500 was down 1.8%. The NASDAQ fell 2.2%.

European markets were mixed in June with the German DAX Index rising 1.1%. Spain (-1.1%), France (-0.6%) and the UK (-0.7%) all fell.

The main concern in Europe was in the banking sector, with credit rating agencies placing a number of Italian banks on watch for downgrade, over concerns about contagion from Greek sovereign debt issues. French and German banks are large holders of Greek Government debt, amounting to US$50bn and US$34bn, respectively.

In Asia, Japanese equity markets were stronger with signs that manufacturing production is beginning to return to more normal levels; particularly auto production. It is expected that disruptions to electricity production will continue through the Japanese summer which could hinder their recovery. The Nikkei and the Topix both rose 1.3%.

Asia ex-Japan recorded losses with China (-5.9%) and Hong Kong (-5.4%) falling sharply on weaker economic data out of China and concerns over corporate governance standards in some Chinese companies. Singapore (-1.3%), Korea (-2.0%) and Thailand (-3.0%) all fell, while Malaysia (+1.3%) rose.

In terms of sector performance in June, the energy sector fell 2.6% on the retreat of the oil price and financials fell 2.5% on sovereign debt and regulatory concerns.

Global emerging markets

Emerging markets underperformed developed global equity markets in June. The MSCI Emerging Markets Index fell 1.9% in US$ and 2.0% in A$ terms.
The largest falls in emerging equity markets occurred in Sri Lanka (-8.0%), Israel (-4.3%) and Brazil (-3.4%). The fall in oil price didn’t stop the Russian equity market rising 7.5%. However, the Saudi Arabia market fell 2.4%. Argentina (+2.2%), Mexico (+2.0%) and the Philippines (+1.0%) all recorded gains.

Global fixed interest

The fall in major global bond yields since mid-April showed signs of abating in late June, but not before achieving new 2011 lows during the month.
US 10-year Treasury yields fell to 2.86% before ending the month at 3.16%, up by 10 bps from end May. Investors were risk averse throughout most of June, fixated by the ongoing peripheral European sovereign debt crisis. US 10-year yields increased post the news that Greece would receive its next tranche of funding.

German 10-year bond yields were unchanged throughout June at 3.02%. The ECB held its benchmark rate at 1.25%, but ECB President Trichet signalled that another rate rise was imminent by noting that the ECB would demonstrate “strong vigilance” in response to mounting inflationary pressures. Inflation held steady at 2.7%, still above the ECB target of below 2%.

The 10-year UK gilt yield increased by 9 bps to 3.38% at month-end. The Bank of England left interest rates unchanged at 0.5% and highlighted that despite the inflation rate remaining well above target at 4.5%, the Committee was now more concerned about downside risks to inflation given the weaker economic outlook. There was discussion that another round of asset purchases could be required.

In Japan, 10-year bond yields fell 1 basis point to 1.14%.

The Australian bond market ended the month relatively unchanged, although during the month yields reacted largely in sync with the US on concerns over global growth, lower risk appetite and the Greek sovereign debt crisis. Ten-year Australian Commonwealth Government Security yields started and ended the month at 5.21%, but dipped below 5% at one point late in June. Market sentiment remained risk averse throughout most of the month, fixated by the ongoing peripheral European sovereign debt crisis.

Despite leading Australian long-term economic indicators remaining above trend, recent data releases has provided evidence that domestic activity has been more subdued. Yields on shorter-dated Australian government securities touched levels below the Reserve Bank of Australia’s overnight cash rate target of 4.75% in June. The last time this occurred was during the credit freeze that followed the Lehman Brother’s collapse in 2008. The UBS Composite All Maturities Index returned 0.6% in June and 5.5% over 12 months.

Listed property

The S&P ASX 200 Property Accumulation Index was down 0.7% in June 2011; outperforming the S&P/ASX 200 by 1.1%.

In stock news, focus remained on the tension between activist shareholders of Charter Hall Office, with a unitholder meeting now called for late July to vote on a change in property manager.

Approximately 50% of the AREIT sector (by market cap) announced their distributions for the second half of the year, with very few surprises observed. The UBS Global Property Investors’ Index (local currency) decreased 2.3% over the month of June, with the UK the top performing region (+1.1%) followed by Australia (-0.8%). The worst performing regions were the US & Canada (-3.2%) and Japan (-3.0%).

The Materials (21.8% of the index) and Energy (5.2% of the index) sectors were the star performers over the quarter, returning +14.7% and +13.9% respectively, boosted heavily by commodity and oil prices. Telecom Services (3.6% of the index) and the Healthcare (2.8% of the index) sectors were laggards, returning -1.6% and -0.8% respectively.
The notable stock contributors were BHP Billiton (+17.7%), Commonwealth Bank of Australia (+9.9%) and Rio Tinto (+25.8%). The notable stock detractors were Brambles (-10.1%), Paladin Resources (-15.1%) and Fosters (-6.1%).

 

 

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