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June 2010 report
- The Australian dollar gained just 0.2% against the USD but was stronger on a trade weighted basis.
- Gold prices remained at elevated levels and the oil price ended the month slightly higher.
- The ASX200 gave back 2.9% in June but finished the financial year up 8.8%.
The Australian dollar increased by 0.9% on a trade-weighted basis in June. The Australian dollar was mixed against the major currencies. The Australian dollar gained just 0.2% against the USD while it slumped 6.1% against the CHF and decreased by 3.2% against the GBP.
Currency volatility was unusually high in June. For example, the Australian dollar traded in eight US cents (9%) range. A 9% trading range puts the month of June 2010 in the top 5% most volatile months since the currency’s float in 1983.
Offshore developments remained the main influences on the AUD in early June. Triggered by worries about the global economic outlook, the AUD weakened in early June. A weaker than expected US payrolls report for May and revelations by Hungarian officials that their budget deficit may be larger than previously thought pushed AUD lower. Participants were reacting to concerns news that high European government debt would slow the global economic recovery.
The AUD trended higher in the middle of June. The ongoing gains in the Australian labour market, and an earlier than expected loosening of China’s steady state USD/CNY policy, helped AUD move to its month high of 0.8859. Also aiding the rise in AUD was the widening of the 2-year bond spread between Australia and the US.
External influences pushed AUD significantly lower in the final days of June. Weak sales of new homes in the US, a downward revision to the Conference Board’s China leading indicator and a sharp fall in US consumer confidence reignited worries about the strength of the global economic recovery.
Equity markets added to the sharp falls recorded in May, with a fresh bout of selling activity in early June. Volumes were light in early June, though volatility increased substantially. The catalyst for the sell-off was the May jobs report. US non-farm payrolls rose by 431k in May, well short of consensus forecasts centred on 500k lift in jobs, and heavily influenced by temporary hiring of census workers. Private sector jobs rose by just 41k. The Dow Jones hit an eight month low of 9816 on the June 7.
The European sovereign debt crisis also added to investor uncertainty in the early part of June culminating in European markets hitting their lows for the month on June 8 - the same day that the IMF released a report that advised the euro zone to speed up budget cuts or risk eroding the confidence of financial markets.
Following a string of successful debt auctions, by Ireland, Belgium, Portugal and Spain, that was met with strong demand, European sovereign debt concerns diminished to a great degree. In fact after hitting its low point for the month on June 8, the FTSEurofirst index rallied for nine straight sessions to a six-week closing highs.
On June 10 and 11, China released a host of economic data that supported the mid month rally in equities. In particular the Chinese export rose by 48.5 in May – the fastest growth pace in three years and far surpassing expectations centred on a gain of 32 per cent. The trade surplus expanded from US$1.7 billion in April to a 16-month high of US$19.5 billion in May. While on June 19, the People's Bank of China announced that it will allow a more flexible Yuan. The strength in the Chinese data gave investors more confidence and fuelled the demand for commodities, which in turn supported equity markets.
However the positive momentum was eroded in the latter part of June, following rather poor economic data on the US housing sector. US new home sales fell a record 32.7pct in May to the lowest levels in more than 40 years. Adding to the investor uncertainty was concerns of a potential liquidity shortfall as European banks repay €442 billion in emergency loans on the July 1.
Overall, the Dow Jones lost 3.6 per cent in June, while the S&P500 fell by 5.4 per cent, and the Nasdaq gave back 6.5 per cent. The German Dax closed flat while the London FTSE lost 5.2 per cent. Domestically the All Ordinaries and ASX200 gave back 2.9 per cent.
For the financial year, the major sharemarkets of North America and Europe generally outperformed Australia over 2009/10 but Japan under-performed. The US Dow Jones lifted by 15.7 per cent, the S&P 500 gained 12.1 per cent and the Nasdaq rose by 14.9 per cent. In Europe the UK FTSE grew by 15.7 per cent and the German Dax gained 24.1 per cent. The All Ords finished the year up 9.6 per cent while the ASX 200 rose by 8.8 per cent. However the Japanese Nikkei fell by 5.8 per cent over 2009/10.
Base metal prices generally weakened in early June, recovered ground over the middle part of the month as market sentiment steadied aided by robust Chinese export data, and then slipped lower again late in the month. Concerns that the international economic recovery was faltering constrained base metals prices. In particular, there were ongoing worries over Europe’s fiscal difficulties, apprehension that China’s growth was decelerating following earlier moves to curb investment in residential property, and fears that the US economic recovery had lost momentum. In this environment, market sentiment was fragile and base metal prices sensitive to macro-economic news. A number of weaker-than-expected US economic releases damped base metals prices, including US consumer confidence data late in the month. News that China was to allow greater CNY flexibility had a temporary positive impact on base metal prices. The gold price touched record highs in June. There was strong safehaven interest in gold.
The gold price remained at very high levels in June, peaking at above USD1,265/oz in intraday trading. The gold price continues to be well supported by investment inflows linked to demand for a safe-haven asset. Investors view gold as providing a haven from international economic uncertainty, variability in currency markets, credit risks (particularly given the fiscal difficulties of some European countries), and longer run inflation risks.
The oil price (WTI) actually finished June modestly higher, although still well below levels prevailing in early-May. Concerns over the international economic recovery remained a constraint on the oil price. But the oil price recovered as market sentiment steadied over the middle part of the month. Market perceptions that the oil price will tend towards the USD75/bbl plus range over the medium term were supportive for the oil price.