Sharemarkets volatility on the rise
World share markets are continuing to rally on rising confidence in global economic conditions. In this article we update our view on economic prospects, interest rates and currencies - and assess what that means for equity markets.
The international environment is proving to be more buoyant that we anticipated, with upside surprises across a number of regions - notably the US, China and Japan. We have upgraded our world growth forecast for this year to 4.5% - up from 3.9% in December - marking the third consecutive year of 4% plus growth. The US appears to have a little more momentum - now forecast to expand by 3.8% in 2006 and China continues to power ahead, with growth likely to be 9%.
Brisk world demand is fuelling higher commodity prices - whereas we had expected 2006 to be a turning point in the cycle. Copper prices for example are surging - jumping 70% so far in 2006, building upon a 40% increase in 2005.
Prospects for 2007 remain a matter of debate. Notably, what will be the impact of rising global interest rates and sharply higher petrol prices? Our core view remains that higher interest rates will have a dampening impact and that global growth will moderate to 3.8% in 2007 - albeit a still healthy environment. However, the alternate view is that the world economy will sail on - with some forecasting growth of 4.75%.
The Aussie dollar is proving to be stronger for longer in this global environment. Rising commodity prices are supportive, as are shifting interest rate differentials. The US dollar has been on a softer trend this year, as monetary conditions tighten in Europe and Asia. The upshot is that we now expect the Aussie dollar to be around US74¢ by end 2006 - rather than US66¢ as we were forecasting back in December.
Wall Street enjoyed another positive month. The S&P500 advanced 1.2% in April and is hitting fresh post 2001 highs early in May. The gains are being driven by fundamentals. The economy expanded by 4.8% annualised in the March quarter and domestic sales surged 6%. This is translating into better than expected earnings.
Interest rates do, however, remain a key issue for US corporates. The US 10 year bond rate has jumped to over 5.10% - from 4.2% a year ago. This is adding to corporate borrowing costs and weighing on the US housing sector. A downturn in the US housing market is still in prospect - as suggested by the forward indicators.
The Australian share market is surging to record highs, increasing 2.4% in April and breaking through the 5,400 mark in the immediate aftermath of the Commonwealth Budget - to be up 13% for the year to date. The resource sector is outperforming in the current environment - with the materials sector up 21% so far in 2006. The P/E ratio suggests that the market is not yet overvalued - however, the market does tend to pull-back on those days when commodity prices fall. Moreover, the sharp run-up in metal prices (such as copper) appears to include a speculative element. But for 2006, with the world economy powering along, resource companies are likely to enjoy strong profitability.
Domestic prospects are however more mixed - with the Reserve Bank lifting interest rates by 0.25% and sharply higher petrol prices reducing consumer spending power. We don’t expect a follow-up rate rise - but the risks in 2006 are tilted to higher not lower rates. The Government’s tax cuts - giving $10 a week to the average worker - will act as only a partial offset. Consumer spending is likely to be sub-par in 2006, but not substantially so, and the housing sector recovery will be delayed. Also, the high Aussie dollar will act as a headwind for price sensitive exporters - particularly international tourism.
|
|
Latest* |
Previous
monthly close** |
% monthly chg |
% change since the
beginning of the year#
|
|
AUD/USD |
0.7720 |
0.7542 |
2.4 |
5.3 |
|
AUD Gold |
910.5 |
846.7
|
7.5
|
29.1 |
|
S&P/ASX 200 |
5352.2 |
5258.8
|
1.8 |
12.4 |
*Refers to 10 May
**Refers to 28 April
#Refers to percentage change since Sydney close Dec 30
Source: Bloomberg, Factset
Important information
Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141, AFSL 233714. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Westpac's financial services guide can be obtained by calling 132 032, visiting www.westpac.com.au or visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is regulated for the conduct of investment business in the United Kingdom by the Financial Services Authority. If you wish to be removed from our e-mail, fax or mailing list please send an e-mail to economics@westpac.com.au or fax us on +61 2 9284 9363 or write to Westpac Economics at Level 2, 275 Kent Street, Sydney NSW 2000. Please state your full name, telephone/fax number and company details on all correspondence. ���©2005 Westpac Banking Corporation.
Information current as at 13 May 2006
