St George Economics economy and finance update

Share Markets:

The positive mood in financial markets continued last night, which drove both the Dow and S&P500 to historical highs. 

Sentiment was supported by stronger than expected Chinese import data which signalled buoyant global demand.

Meanwhile, a renewed commitment by the Japanese Prime Minister to maintain its two percent inflation target indicated the Bank of Japan would continue to pursue aggressive monetary easing.

Overnight, the Dow rose 0.9%, the S&P500 lifted 1.2% and the Nasdaq rose 1.8%.
 

Bonds:

Treasuries fell (yields rose) as stronger risk appetite dampened demand for safer government bonds.

The FOMC minutes which said that several members favoured pulling back on bond purchases may have also weighed on demand.
 

Foreign Exchange: 

The US dollar rose against most currencies on the prospect of quantitative easing pulling back by late 2013.

Meanwhile, the Japanese yen continued its slide to its weakest in four years as authorities reasserted its commitment to aggressive quantitative easing.

The Australian dollar strengthened to around 1.054 supported by strong Chinese import data and the more positive risk environment.
 

Commodities:

Most commodities weakened despite the more positive risk environment.

Copper prices fell on poor Chinese copper import data, although overall imports were strong.

Gold fell sharply on news that Cyprus was to sell its gold reserves to raise cash and following the Fed minutes.
 

Australia:

The Westpac-Melbourne Institute index of consumer sentiment fell 5.1% in April to 104.9.

Events in Cyprus appear to lie behind the decline, demonstrating how fragile consumer sentiment can be. Nonetheless, the number of optimists continues to outweigh the number of pessimists.
 

China:

Chinese exports rose 10.0% in the year to March while imports were up 14.1% over the same period.

For the month of March, China reported a trade deficit of US$0.9 billion.

China's trade surplus in February was US$15.2 billion and has been in strong surplus for twelve months.
 

Europe:

Slovenia has been the latest country to be flagged for a potential bailout, with questions raised on whether the government can raise enough funds to fund its deficit and recapitalise its struggling banking sector.

The problems in Slovenia are similar to Cyprus (also Spain and Ireland) in that they have stemmed from banking problems, although Slovenia's banking sector is much smaller as a percentage of GDP.

If external assistance is required, investors will be watching closely how Slovenia will be treated and if Cyprus's situation was indeed a "one off".
 

United States: 

The US FOMC minutes continued to show a wide range of views among committee members about the timing of withdrawing its quantitative easing program.

Several saw QE tapering by mid-year and done by year end if the economy continues along the expected path and labour market conditions improved, while a few saw a reduction in purchases by mid-year.

 

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