News

World markets: the BT view

After showing signs of growth in recent months, markets last night experienced falls across the board. Overnight figures showed the Dow Jones, Nasdaq, FTSE 100 all fell by around two to three percent.

What can we expect from here and what does this mean for the Australian market?

Overnight market activity

Firstly - what’s causing the volatility? The US had an exceptionally good reporting season for the June 2010 quarter, with the majority of S&P 500 companies recording results well ahead of expectations. US GDP growth also improved. The market interpreted this news as evidence that the US economy is improving at a stronger rate than initially expected. 

In recent days, this view has been countered by a number of points.

GDP has risen, but it’s more to do with inventory rebuilding than a significant increase in demand. US producers have increased production to rebuild inventory levels, but that hasn’t yet translated to stronger US consumption. In short, US producers have been restocking the shelves but the US consumer hasn’t been consuming at the levels previously expected.

New US trade figures however showed the US import levels were higher than export levels mainly thanks to consumer spending – so even if the US consumer is consuming, they’re buying more imports than domestically-produced goods and services.

This means second quarter GDP figures for the US will be revised downwards, and it’s that headline news that has played a big part in the overnight market downturn.

Patrick Farrell, Head of Advance Investment Solutions, sees the current market movements as a recalibration of growth, rather than a downturn. “The markets have gone through a recent period of solid gains supported by the bottom-up earnings numbers.

“The overnight weakness is more about the market hoping for better than expected economic numbers, particularly out of the US and China, to reinforce the recent positive momentum. Unfortunately, the numbers just failed to excite”.

The other contributing factor is the role the US Federal Reserve can play in stimulating the economy. The US Federal Reserve has already reached the limits of normal monetary policy and has been resorting to ‘Quantitative Easing’ (QE), or printing money to try to stimulate the economy further. 

Before this week’s announcement, the market believed the US economy was on a stronger growth path. The announcement of more quantitative easing by the US Federal Reserve has countered this view.

The Australian market

BT Chief Economist Chris Caton doesn’t expect the overnight activity to significantly impact the Australian market, as some of the falls have already been built into the local market.

Patrick Farrell agrees, suggesting you shouldn’t read too much into the overnight results if you’ve set your sights on the longer-term. 

“Volatility is a consistent feature in markets and we still have a way to go before we reach smoother market trends. But if you look at the underlying figures, there is a lot of substance in the market. Take a top down view and you’ll see a lot of volatility. Take a bottom up view, and you’ll see a more solid base for market growth”.

Over the longer term, both Chris Caton and Pat Farrell are both positive about the prospects of the Australian market, expecting the Australian market to climb to around 4800 by the end of September and push on to above 5000 by the end of the year.

The BT Investment Management view is bonds should also perform well in this environment of heightened market volatility and are a diversifying asset.

As always, we recommend taking a step back from the day-to-day fluctuations of investing and look to the bigger picture.