The Australian share market started the new financial year strongly, gaining 4.5% to close July at 5,623 points. The good news may be short-lived however, with the US share market experiencing it's biggest daily fall since February overnight.
US stocks were sharply lower in Thursday trading as investors weighed disappointing earnings and Argentina's default, while considering the possibility of an earlier-than-expected rise in US interest rates.
Consequently, global share markets were mixed for the month of July, with the US Dow Jones Index falling 1.6%, the London the FTSE falling 0.2%, the Hong Kong Hang Seng Index gaining 6.8% and the Japan Nikkei 225 Index gaining 3.0% for the month.
Argentina missed its payments on a bond issue after it failed to reach an agreement with "holdout" hedge-fund creditors. The international ramifications of the default are expected to be slight, noting that the default marks the 8th time in history that the Argentinian government has defaulted on its credit obligations (as shown in the table below).
The default will hurt the Argentinian economy that is already in recession, and is a set-back to the Buenos Aires government's attempts to return to global credit markets.
Argentina has been isolated from international financial markets since its record $100 billion default in 2002. The fear now is that the need to print money to finance its deficits will further spur inflation, putting the exchange rate under renewed pressure. Add in the likely jolt to consumption from default, and the recession will only deepen.
The ongoing conflict in the Ukraine, and now tragedy that is the Malaysian Airlines MH17 disaster, intensified strongly during the month. While the international response to the Russian backed separatist forces has been weak from an economic perspective, continental Europe's reliance on Russia for natural gas makes economic sanctions complicated. Australia's response thus far has been profound.
Interest rates again remained on hold in July, however a Goldman Sachs Fixed Income manager made headlines in the month by suggesting that the RBA may cut rates to reign in the Australian Dollar. While this certainly is not the consensus view, talk of a rate increase this year have subsided. The RBA will meet again next Tuesday to assess rates.
The Australian Dollar declined by 1.3% in the July and is currently buying 93.03 US cents.
For more information please contact Ryan Love on 1300 856 338 or e-mail ryan.love@apexpartners.com.au.
This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.