Market News
The Australian Share Market performed negatively for the first month of 2014, losing 162.2 points or 3.03%.
January saw global equity markets post their biggest fall since August, with the culprit being a flight out of emerging markets. The switch saw emerging equity markets and their currencies suffer heavy losses. The trigger appeared to be weak data out of China as well as jitters over its shadow banking system.
The US Fed also continued to taper its purchases of Treasury and mortgage-backed securities, reducing the monthly purchase rate by another $10 billion to $65 billion. Janet Yellen officially took over the leadership of the US Federal Reserve from Ben Bernanke yesterday. Janet is the first woman to lead the Fed in its 100 years. She faces a delicate task: Unwinding the Fed’s extraordinary economic stimulus without spooking investors or slowing a still-subpar economy.
Within the Australian market most sectors posted small negative returns for the month of January. The exception being the defensive sectors of Utilities (+0.9%), REITs (+0.5%) and Healthcare (+0.3%). Financials (ex REIT’s) were the worst performing sector losing 4.7% over January.
The Australian dollar continued to weaken against most major currencies on falling commodity prices, and fell to its lowest level against the US dollar since mid-2010.
Forecast wise, UBS targets an ASX200 level of 5700 by year-end 2014 (current level 5190). This represents a total return potential capital return of 9.8%. UBS also expect the A$ to be around US$0.85 by year-end 2014.
Interest Rates
The RBA held the cash rate unchanged at 2.50% at February’s board meeting, as widely expected.
The RBA effectively moved to a ‘neutral’ bias, after previously having somewhat of an ‘easing’ bias (with their December minutes ‘not closing off the possibility of further reduction in rates’).
The RBA’s position on the Australian Dollar has changed from:
“still uncomfortably high”, and a “lower level… is likely to be needed to achieve balanced growth in the economy”
And is now stated as:
“the exchange rate has declined further, which, if sustained, will assist in achieving balanced growth in the economy”; and “beyond the short term, growth is expected to strengthen, helped by continued low interest rates and the lower exchange rate.” While the AUDUSD bounced 1% post these comments, it remains near a 3½-year low.
The key data since the RBA’s last meeting was Q4 CPI, which “was higher than expected” However, the RBA expects inflation to be “still consistent with the 2–3 per cent target over the next two years ……if domestic costs remain contained, some moderation in the growth of prices for non-traded goods could be expected over time.”
The RBA also significantly changed their closing policy outlook and effectively included a type of ‘forward guidance’, adding “on present indications, the most prudent course is likely to be a period of stability in interest rates.”
In the US we expect the Fed will continue to taper – despite some softer recent data – seeing the AUDUSD ease to (a ‘more comfortable’) $0.85. Further, domestic data shows ongoing improvement (business conditions & non-residential building application). But, with a still soft labour market, and today’s RBA ‘forward looking guidance’, we see rates on hold in 2014.