Cash The Reserve Bank of Australia (RBA) left the cash rate unchanged at 6.0% during the month. The UBS Bank Bill Index returned 0.5% for the month. Australian bonds The UBSA Composite Bond (All Maturities) Index returned 0.8% in September, following a strong August (+1.1%). The Australian bond market tracked international markets, as yields moderated, and returns moved higher. Weaker economic data from the United States weighed on bond markets. The oil price, which had fuelled inflationary fears, fell sharply in September (-10.46%) to $62.90. During the month, the International Monetary Fund cut the Australian GDP forecast (+3.1%, previous: +3.3%). While the Australian economy is slowing, it is in its 15th year of economic expansion, the longest in a century. A surge in home building approvals (July: +8.3%) and company earnings (July: +3.3%), increased the probability that the RBA would raise interest rates to manage inflation. The 3-year and 10-year bond yields ended the month at 5.8% (-4bps) and 5.5% (-16bps) respectively. At the shorter end of the yield curve, 3-month bonds remained unchanged (+6.2%). The market has priced in another rate rise before the end of the year. International Bonds The Lehman Global Aggregate Index returned 0.8% (hedged, A$). The US Federal Reserve left rates unchanged at 5.25%. Against the backdrop of a declining crude oil price US CPI (August: +0.2%, previous: 0.4%) rose at a slower pace than expected. During the month, the University of Michigan released figures that showed Americans were more optimistic about the outlook for inflation and the economy than in recent months. The Federal Reserve stated in its meeting minutes that "inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices". This led US 3-year and 10-year bond yields to end the month at 4.6% (-9bps) and 4.6% (-10bps) respectively. In Europe, the European Central Bank (ECB) and the Bank of England left rates unchanged, after raising rates last month. ECB President Trichet signalled that the Bank would increase interest rates in October, which they did, saying that inflation would exceed its previous forecasts. European business confidence and manufacturing growth slowed more than expected in August. European 3-year and 10-year bond yields ended the month at 3.6% (+10bps) and 3.7% (-6bps) respectively. In Japan, rates remained unchanged. The Bank of Japan Governor said that consumer prices would continue to rise, and that last month's downward revision of CPI, would "not prompt the Bank to change its stance" of gradually raising rates. Japanese 3-year and 10-year bond yields ended the month at 0.7% (+2bps) and 1.7% (+4bps) respectively. Australian Listed Property Securities The S&P/ASX 300 Property Trust Accumulation Index returned 3.8%, making it the best performing asset class for the month. The best performing sectors were Industrial (+4.6%) and Retail (+3.8%). The worst performing sector was Diversified (+3.4%). The best performing stocks were Reckson New York (+9.9%) and Grand Hotel Group (+9.6%). Both continued their strong performance following the takeover offer from Malaysian property conglomerate Mulpha. Westfield (+3.0%) continued to underperform the benchmark. International Listed Property Securities The UBS Global Investors Hedged Index (+3.2%) performed strongly over the month. Despite the concern of weaker consumer spending in US, on the back of a slump in US housing starts, the Retail sector delivered a solid return for the month (+4.5%). The best performing markets were Continental Europe (+8.8%), UK (+7.0%) and Singapore (+7.9%). Hong Kong was the weakest market over the month, with the UBS Investors Index down 1.7%, largely attributable to weakness in the Diversified sector. The US market was also relatively subdued returning 2.1%. Australian Shares The S&P/ASX 300 Accumulation Index returned 1.3% for the month. September was a volatile month as commodity prices fell. The best performing sectors were Healthcare (+9.6%), Industrials (+5.3%) and Utilities (+5.0%). Healthcare was the best performer as Merger and Acquisition (M&A) activity dominated. There were also takeover offers for Mayne Pharmaceuticals (+40.4%) and DCA Group (+35.6%). The worst performing sectors were Materials (-2.5%) and Energy (-2.4%) as declining commodity prices weighed on returns. BHP (-6.7%) was the worst performing large capitalisation stock over the month. M&A activity underpinned the return of the share market. Hardman Resources (+41.2%) received a takeover offer from UK-based Tullow Oil. In the Healthcare sector, Symbion Health made an offer for Primary Healthcare Pathology Business. There was also Diversified industrial company Wesfarmers (+3.9%) bid for insurance broker OAMPS (+22.0%). Profit warnings were also issued by Australian Pharmaceuticals Industries (+8.8%), CSR (-5.4%), Orica (0.0%) and Westpac Banking Corporation (-2.8%) who warned of margin decline and cited slowing trading income. International Shares The MSCI World Ex Australia Index (net div) returned 2.0% (hedged, A$) in September, underperforming the unhedged return (+3.6%). The Australian dollar declined against the US Dollar (-2.3%), Japanese Yen (-1.6%), Euro (-1.3%) and the UK Pound (-0.5%). The US (S&P 500: +2.5%) was one of the best performing developed markets. Rising optimism buoyed by the falling oil price and hopes of an end to interest rate hikes supported equity markets. US investment banks, buoyed by the spate of corporate activity reported during the month, all exceeded market expectations. Europe (MSCI Europe: +2.2%) registered strong performance. The best performing market in Europe was Germany (DAX: +2.5%) despite investor confidence slumping to the lowest level in seven years, as higher interest rates and a planned tax increase dimmed the outlook for growth. The UK share market (+0.9%) recorded weaker performance, as retail sales declined with consumers adjusting to the August rate rise by the Bank of England. Japan (Nikkei 225: -0.1%) was the worst performing developed market. Producer prices rose at the fastest pace in 25 years, placing pressure on companies who are struggling to pass on rising oil and commodity costs. Global Emerging Markets
The MSCI EM Index in $A (with div reinvested) returned 3.2%. Telecoms (+5.5%) and Financials (+3.5%) were the best performing sectors. Energy (-5.7%) and Health Care (-2.1%) were the worst performing sectors. Following the fall in the oil price over the month, the Russian market was down, falling 6.7% for the month in local currency terms. The South African market was also relatively lacklustre, up 0.5% impacted by falling commodity prices around the globe. Despite the political uncertainty, Thailand was up 0.5% for the month. Asia was the best performing region rising 3.3%. There was no "contagion" effect from the political uncertainty in Thailand. Latin America was up 1.8% and Emerging Europe, Middle East and Africa (EMEA) down 2.7% (dragged down by Russia). Global emerging markets continued to be volatile over the month as investors became more risk averse, with spectators closely watching data from the US. Inflation remains a key issue although the recent fall in oil prices and a slow down in economic growth should ease inflationary pressures. This should be positive for emerging markets.
18th-October-2006 | 
