February was another bad month for investors with global share markets continuing to decline following more evidence of an intensifying global recession. The Australian market closed in the red for the sixth month in a row, despite another interest rate cut by the Reserve Bank and the Rudd Government’s announcement of the another stimulus package.
A poor month for global share markets
All leading market indices fell on the back of further weakness in the global economy. In the US, consumer confidence fell to its lowest level since 1967 and new figures show that the housing market continued to deteriorate – at the end of 2008, 19 million homes stood empty and home ownership fell to an eight-year low as banks seized homes faster than they could sell them. The US economy also contracted more than expected in the last quarter of 2008 by 6.2% (annual rate) which is its biggest fall since 1982.
This news had a profound effect on the US market, as the benchmark S&P 500 Index ended the month on a 12 year low, or down 11% at 735.09 points.
It was a similar story around the globe. European markets finished February more than 11% lower thanks (in part) to concerns that many eastern European banks – many of which are subsidiaries of western European banks – face significant downgrades to their ratings. Banks from Austria, Italy, France, Belgium, Germany and Sweden account for 84% of western European bank loans in Eastern Europe, so any ratings downgrades would have a major knock-on effect.
In Japan, the Nikkei 225 Index fell 5.3%, after GDP growth fell 3.3%, in the December quarter. It was the third quarter in a row that growth fell and is the country’s worst outcome since 1974.
Source: Premium Data. Chart rebased to 100.
Oil up for the first time in eight months
Oil prices finally reversed their recent downward trend, posting their first gain in eight months. Prices were 7.4% higher at US$44.76 a barrel, as an unexpected drop in US stockpiles and a slump in the US dollar increased the appeal of commodities. The United Arab Emirates’ decision to cut supplies to Asia from April 2009 also helped the gain.
Despite the uptick in February, oil prices are still way down on this time last year when they were trading at US$101.84 a barrel, and are likely to remain low until global growth picks up again.
Source: Premium Data
Central banks cut rates yet again
Many of the world's central banks were active in February. In particular, the Bank of England lowered its benchmark interest rate from 1.50% – already its lowest level since the Bank was founded in 1694 – to just 1.00%.
The Reserve Bank of Australia (RBA) lowered interest rates by a full 1.00%, bringing the official cash rate down to 3.25%, which is its lowest level in 45 years. However, the Bank has since hinted the days of 'super-sized' rate cuts of 0.75% and 1.00% may have come to an end – barring any further significant global financial crisis, of course.
The European Central Bank (2.00%) and the Bank of Japan (0.10%) left their rates on hold. The US Federal Reserve didn’t meet in February, although interest rates in the US aren’t expected to move any lower than the 0% to 0.25% range they’re currently sitting at.
Australian market falls yet again
The Australian share market had its sixth consecutive month in the red in February, with the S&P/ASX 200 Accumulation Index closing 4.6% lower thanks to a weak lead from the US, some poor profit results from the likes of Woolworths, QBE and Telstra, and rising job losses.
The fall came despite the RBA's interest rate cut and the Rudd Government's announcement of a $42 billion economic stimulus package to help prevent the economy from falling into recession. The package includes A$12.7 billion in grants from next month to families and low income earners and A$28.8 billion on infrastructure.
Source: Premium Data
Australian dollar little changed
After slumping 10% against the US dollar last month, the Australian dollar (A$) was little changed in February, closing at US$0.6387 cents. The A$ hit as high as US$0.6849 cents mid-month but came back after weaker commodity prices and some softer economic data caused investors to offload the local currency.
It's difficult to imagine any sort of sustained recovery in the A$ in the near-term, particularly if global growth remains weak and commodity prices continue to trend lower. However, the currency should begin to rally as growth begins to improve next year.
Looking ahead
Not a lot has changed in the last month. Recessions in the world's biggest markets – notably the US, Europe and Japan – continue to gather momentum and growth is expected to weaken further in the near-term. The good news is global growth should begin to pick up later this year and into 2010 as the economic stimulus packages introduced in these regions begin to take effect. However, there's still little doubt that both global and domestic shares remain oversold, which means they continue to represent good value for investors with a long-term view.
In Australia, economic data has weakened in recent months, particularly unemployment, which now sits at 4.8%. This is the highest rate since June 2006 and almost a full 1.00% above the most recent low set this time last year. However, it's not all bad news for Australian investors after some positive comments from RBA Governor, Glenn Stevens.
In his latest testimony, Stevens suggested that the combination of stimulatory fiscal policy, a weaker A$ and still-functional financial system leaves Australia "better positioned than many countries to ride out the international difficulties." This is obviously a good sign for our economy and should give local investors confidence in light of what's been happening in the US and elsewhere.