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Market Commentary
December quarter 2011
Markets rise but investors remain cautious
Global share markets ended the final quarter of the year higher, though the gains did disguise the increasing uncertainty surrounding Europe’s ongoing debt woes. Hopes of a firm resolution to the region’s debt crisis saw markets rise strongly in October, however the rally proved to be relatively short lived as renewed fears about the solvency of Greece, Spain and Italy sparked a sell off in November. Whilst most major markets posted modest gains in December – due in part to better US economic data and further moves by European officials to try and resolve its debt crisis – investors nonetheless remained cautious into year-end amid concerns that the situation in Europe will impact global growth in 2012.
Meanwhile, the Australian share market rose in line with its global counterparts on the back of some better-than-expected domestic data and the Reserve Bank of Australia’s (RBA) decision to reduce interest rates.
Reserve Bank cuts interest rates
The RBA lowered interest rates twice during the December quarter; taking the official cash rate from 4.75% to 4.25%. Citing further deterioration in European debt markets and greater downside risks to Australian growth, the central bank cut rates first in November and then again in December. Importantly, with Australia’s cash rate already relatively high compared to other central banks, the RBA does have the ability to cut interest rates more aggressively throughout 2012 should market events warrant it.
Australian economy expands in the third quarter
After having grown by 1.2% in the June quarter, the Australian economy continued to expand in the September quarter (1.0%). Perhaps not surprisingly, growth was led by a strong rise in mining investment as well as a jump in construction activity in the wake of the Queensland floods. Whilst the outcome was clearly a good one in light of events in Europe, it does reinforce the view that Australia’s growth is very much tied to the mining sector, with most of the improvement in domestic activity concentrated in resources-related industries.