July, 2012

Global Economic Overview: Central Banks Move To Calm Market Volatility

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Global stock markets are consolidating near their lows for the year as investor sentiment looks for clues on the next major trend direction. With the debt problems in Europe and the manufacturing slowdowns that are seen in China and the US, sentiment remains cautious and any rallies in stocks and commodities have been limited. This type of activity is expected to continue in the near-term as markets have likely already seen their highs for the year.

July_Euro_Area_Interest_Rate

External Factors Weigh on Australia's Economic Prospects

In Australia, we are seeing central bank responses to help quell these external market shocks and these have come with government energy initiatives and measures to counter budget deficits in local regions. But even with these measures, there continues to be evidence for sustained weakness, as the elevated value of the Australian Dollar (which will likely weigh on export prospects) and gradual declines in corporate earnings growth for the mining industry are darkening economic prospects for the remainder of the year.

These negative trends are being confirmed by the flattening yield curve in the bond markets. A flattening yield curve shows that short-term and long-term investment returns are close to being equal, and, historically, this phenomenon tends to foretell slowdowns in economic growth and weakness in bank earnings. This flattening yield curve is likely to remain in place for some time, as investors continue to price-in weakness in the coming quarters.

Rate Cuts Versus Economic Data

Central banks globally have taken measures to help calm some of the market volatility by reducing interest rates as a means for stimulating credit lending and overall growth. The latest examples of this were seen in China and Europe, where the European Central Bank (ECB) and the People's Bank of China (PBoC) both elected to cut interest rates as a means of stimulating foreign investment and consumer confidence in both regions. The rate cut from the ECB was perhaps the larger story of the two, as rates are now seen at an all-time low of 0.75%.