Market update

As at 30 September 2008

International shares

In local currency terms the MSCI World index fell by 10.8% over the month of September whilst unhedged investors received a lower negative return of 3.6% (the Australian dollar was 6.5% lower on a trade weighted index basis).

Global markets sunk sharply as the credit crisis entered a new and more menacing phase. Intense fear of inter-bank lending threatened the survival of some on the world’s most powerful financial firms. Volatility rose to record highs followed closely by government bailouts and forced mergers. Regulators attempted to stabilise these markets by injecting liquidity and temporarily banning short selling of financial stocks. In addition, the US Treasury unveiled the Troubled Asset Relief Program (TARP).

All US sectors declined during September with industrial commodities shares falling hardest as prices continued to retreat (MG Metals Index down 13%) while the consumer staples sector was strongest at -1.6%.

European markets (France - 10%, Germany - 9.2%, UK - 13%) were weak largely due to bailouts of Breadford & Bingley in the UK, Fortis of Holland and Lloyds rescue of HBOS. Japan followed 13.9% lower.

Australian shares

September was a month of extreme volatility for the Australian sharemarket driven by the extraordinary events in the US. The Australian market moved in line with global markets, banning short selling in response to major one day declines and local trading uncertainty. Resource stocks and highly geared names took strong losses during the month. Most out-performance came from sectors such as staples, telecommunications and health. Gold was the lone commodity to rise (+4.8%).

Cash and fixed interest

The global economic slowdown continued in September driven by the US financial system. The US financial crisis intensified with Lehman announcing bankruptcy, BA acquiring Merrill Lynch and AIG seeking an $85 billion rescue loan.

US retail sales remained soft and unemployment rose to 6.1%. The Federal Reserve left the federal funds rate on hold at 2% during September, but cut rates by 0.50% in early October. US 30 year bond yields fell by 0.11% to 4.31% while 10 year bonds were unchanged at 3.82%.

Australian economic data was mixed in September with Gross Domestic Product slowing to 0.3% in the June quarter driven by less consumer spending. Reflecting this slowdown in demand, the Reserve Bank of Australia cut the cash rate from 7.25% to 7.00% on 3 September and by 1% (to 6%) on 8 October.

10 year Australian bond yields fell by 0.35% to 5.39%. The Australian dollar fell by 6.5% on a trade-weighted index basis as investors sought to exit the currency in favour of the Japanese Yen.