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3 Minute Economic Summary – May 2017

Article By Adam Camac | | Financial Planning
  • The main themes driving markets in May were the release of the Commonwealth budget in Australia, as well as the election in France and stable economic data globally.
  • In Australia, the budget was at the forefront of discussion, with the centrepiece being the return to a budget surplus by 2020 – 21. The introduction to the bank levy dominated financial headlines, and caused the ASX200 index to fall -3.4% as the big banks (which fell -7.7% over the month) dragged the index down. The unemployment rate fell to 5.7% from 5.9%, largely due to an increase in part-time employment, with wage growth remaining stagnant causing weaker than expected retail sales.
  • The election of the more conservative Emmanuel Macron in France diminished some investor concerns around the stability of the European Union, however political uncertainty still remains high.
  • In the US, concerns are growing about the Trump Administration’s ability to enact its policy agenda, which saw the VIX index (a popular gauge of ‘fear’ in the equity markets) spike 50% mid-month, however this eventually recovered towards the end of the May.
  • Increasing debt levels, slowing growth rates and a large dependence on policy stimulus prompted Moody’s (a credit rating agency) to downgrade China’s credit rating to Aa3 from A1. While this prompted some weakness in the Australian Dollar, the downgrade has so far had seemingly little impact on financial markets.
  • Global shares made solid gains in May of 1.7% in local currency terms following on from encouragingly positive economic data and corporate earnings from the US (which sent the S&P 500 and the Nasdaq to all-time highs) as well as the reduced investor concerns through Europe.
  • Global bond yields moved lower in May following on from April’s trend of continued falling energy prices and likelihood of rising interest rates.
  • Australian government bond yields fell in May given the mixed economic data. The Reserve Bank of Australia again decided to keep the cash rate steady at 1.5%.
  • The Australian Dollar (AUD) fell in May. Lower commodity prices (particularly iron ore and energy) and the credit downgrade in China served to soften the AUD.

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