Finance Markets

Introduction & Background

The condition and volatility of Global Financial Markets have powerful implications on domestic markets across the world. Markets are constantly changing and especially recently global markets have been highly volatile, ever since the Global Financial Crises in 2008. This report sets out to reflect on the current state of the global economy and how that implicates on the Australian Domestic Market. Through analysis of newspaper articles from the Australian Financial Reviews over 8 weeks from August to September, this report aims to show not only the present state of the economy, but also what has lead to its current financial position and the prospects looking forward to future stability and or volatility.

The global economy has shown mixed performance indicators over this period, including slight recoveries in the U.S. through employment levels rising and on the other hand further hardship in Europe with countries defaulting and China has slowed due to rising labour costs. However these recent changes are only minor in regard to the overall position of these states in the global economy, The U.S. and Europe have continued to struggle relatively and China has continued to grow. The ability of Australia to remain in its strong position shows high investor confidence in our domestic market. The international demand for our mining sectors has affectively enabled our economy to remain relatively unaffected by the global uncertainty that has had ripple on affects since 2008.

The world economy however remains very volatile. This can be seen especially in the U.S and Europe, as uncertainty and lack of confidence still exists at unprecedented levels. The Bank for International Settlements (BIS) has commented on the uncertainty and unpredictability of the market:

"The world is now five years on from the outbreak of the financial crisis, yet the global economy is still unbalanced and seemingly becoming more so as interacting weaknesses continues to amplify each other. The goals of balanced growth, balanced economic policies and a safe financial system still elude us."

This statement refers toward the situation of unbalanced economies, in that weaknesses are not being addressed and in many ways can even be hidden by strengths within economies. This can be seen most obviously in the Australian domestic market where as the mining sector is able to 'pick up the slack' of other struggling industries such as retail which is becoming increasingly more difficult to compete on a global standard. The key for moving forward as suggested by the BIS is a stronger emphasis toward balanced growth.

This report also aims to show the effect of global market conditions on Australia's entity within the global market. The position of the Australian dollar and the rising levels of investment into our market reflect the prominence of the Australian market internationally, not only due to its minerals but also as a prominent figure within the financial sector. Investment levels from Australia have also been notably strong, 15% of capital raisings in 2008-2009 globally, occurred in Australia. This trend has continued throughout the past few years and will continue to establish Australia as a strong financial market place in on a global scale.

Sources of Data

For completion of this report the use of secondary sources were undertaken, the major source was a newspaper specifically 'The Australian Financial Review' many other secondary sources were also used such as online sources for graphs, tables and textbooks which are listed under the sub-heading references. The use of quantitative and qualitative analysis has been undertaken with the use of detailed articles, graphs and tables containing qualitative information all combined to produce an accurate and detailed report for the reader.

Findings

WEEK 1

Financial Event 1:'Dollar signs look positive'

Source: The Australian Financial Review Date: 6 August 2012

The Australian Dollar has reached its highest level since March 2012. The currency closed at US$1.0569 on Friday the 3rd of August, this has been credited to renewed optimism in Europe and strong United States job report figures which strategists have relied on to point towards further economic potential. Westpac currency strategist Sean Callow said American payroll numbers associated with the increase of 163,000 jobs in the US economy has shown "a sign of life in the US economy" and this has translated to demand for the Australian dollar.

Furthermore the strength of the Australian domestic economy has been performing strongly which can be seen through the decline in traders who expect rate cuts. Sean Callow went on to say that "The RBA should be confident in keeping a steady hand with rates as the domestic economy is quite strong." 16% of traders believe that the RBA will drop rates by 0.25 percentage points the next RBA meeting which is down from 64% of traders the same time last month. This indicated that many traders and economists believe the Australian domestic market has strengthened over the last month. A strong domestic market combined with a recovering US market and increased optimism in Europe has lead to the strength of the Australian dollar this week.

Financial Event 2: 'RBA can afford to keep its rate-cut powder dry'

Source: The Australian Financial Review Date: 6 August 2012

The RBA are said be leaving interest rates firmly on hold at their next policy meeting, despite benign consumer price index reports and another slowdown in the global economy in the recent months. One of the major reasons interest rates will remain on hold is because of the amount of money households are receiving as part of the carbon tax over-compensation, this has lead to increased consumer spending. It has also been apparent in the housing sector over the last year that the decreases in interest rates have had a positive impact, with residential building approvals surging and house prices stabilising. On the other hand overall business conditions remain varied, with the business conditions index of NAB remaining below average and soft employment indictors suggesting rate of unemployment is likely to increase in the coming months.

The Australian Dollar remains firm, and at this stage the RBA are not too concerned with the Australian Dollar at current levels because the terms of trade are high and the mining investment seems promising. Australia's current situation