Australia feels the pinch of global crisis

Economic jitters continued to reverberate around the world yesterday with Australia not immune to the pain being felt globally.

By InvestSMART · 3 Jun 2012

By InvestSMART ·
3 Jun 2012

Comments

Economic jitters continued to reverberate around the world yesterday with Australia not immune to the pain being felt globally.

The Australian dollar sank to its lowest point against the US dollar in almost eight months, hitting 96.34 US cents at the end of five weeks of straight losses against the greenback.

It was also grim news for Australian shares, which suffered their biggest losses in two years last month, shedding about 7.3 per cent or about $100 billion.

The ASX200 is expected to continue its slide when markets open tomorrow.

The downward spiral will put pressure on the Reserve Bank to cut its cash rate again when it meets to set interest rates on Tuesday.

Sharemarket investors predict an even chance for a 50 basis-point cut in the cash rate with a 25 basis-point cut almost certain, while economists are divided on whether the Reserve Bank will lower the rate or leave it steady at 3.75 per cent.

Last week, Westpac's chief economist, Bill Evans, predicted that the official cash rate would drop as low as 2.75 per cent by Christmas and standard variable rates on mortgages would sink to 6 per cent.

However, the predicted fall in interest rates is not enough to restore faith in the property market, with home buyers increasingly gun shy, according to May figures from RP Data-Rismark.

Median house prices in Sydney dropped by 2 per cent last month, following three months of growth.

The decline was most severe in the more exclusive end of the Sydney market, with prestige properties falling by 6.4 per cent in May.

However, Sydney unit prices fared reasonably well, increasing by 2.2 per cent over the same period.

While May is traditionally a sluggish period in the property market, analysts have also pointed to international economic turmoil to explain why buyers are spooked.

The latest ructions were triggered by disappointing US employment figures for the month of May. Unemployment rose from 8.1 per cent to 8.2 per cent over the period, raising questions about whether the US will be able to drive a global recovery.

US stocks fell more than 2 per cent on the back of the jobs report, adding to fears that Europe's spiralling debt crisis was dragging down the world economy.

Major markets in Europe were down last week and there are continued concerns about Greece's potential exit from the eurozone.

Australia's resource sector, credited with protecting the economy from the worst of the crisis, is looking shaky due to a fall in oil prices and an economic slowdown in China.

Resource companies face a tough start to this week, especially those in the energy sector, after oil prices sank 3.8 per cent in New York to the lowest level in eight months.

BHP Billiton shares fell 0.8 per cent in New York, while Rio Tinto's US-listed shares fell 1.2 per cent.

Australia's biggest market, China, is also showing signs of softening, denting commodity prices and cutting demand for the Australian dollar.

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

Why has the Australian dollar fallen to its lowest level in months?

The article says global economic jitters have driven the Australian dollar down — weak US jobs data, fears about Europe's debt crisis (including concerns over Greece), softer demand from China and falling commodity and oil prices have all weighed on the AUD. It sank to about 96.34 US cents after five weeks of straight losses, its weakest in almost eight months.

What caused the recent big drop in Australian shares and the ASX200?

Australian shares suffered their biggest monthly loss in two years, shedding roughly 7.3% (about $100 billion) as global market declines spread to Australia. The article links the sell-off to disappointing US employment numbers, eurozone debt worries and a slump in commodity prices — and it notes the ASX200 was expected to keep sliding when markets reopened.

Is the Reserve Bank of Australia likely to cut the cash rate soon?

According to the article, the market is pricing in a possible cut: sharemarket investors put an even chance on a 50 basis-point cut and saw a 25bp cut as almost certain. Economists were divided about whether the RBA would lower its cash rate or keep it at 3.75% when it met on Tuesday, and the recent market weakness was creating pressure for a rate cut.

What are the mortgage and cash rate forecasts being discussed by economists?

The article cites Westpac chief economist Bill Evans, who predicted the official cash rate could fall as low as 2.75% by Christmas and that standard variable mortgage rates might fall to around 6%. The piece presents these as forecasts rather than guaranteed outcomes.

How is the property market responding to the economic slowdown and rate forecasts?

RP Data‑Rismark data in the article suggests rate cuts alone may not restore buyer confidence. Median house prices in Sydney dropped about 2% last month after three months of growth, prestige Sydney properties fell about 6.4% in May, while Sydney unit prices actually rose around 2.2% over the same period. Analysts say international turmoil is contributing to buyers being gun‑shy.

How did recent US jobs figures and European debt concerns affect global markets?

The article notes US unemployment rose from 8.1% to 8.2% in May, which sparked worries about the durability of a global recovery. US stocks fell more than 2% on the jobs report, and weakness across major European markets — plus concerns Greece might exit the eurozone — added to fears that Europe’s debt crisis was dragging down the world economy.

What's happening in Australia’s resource and energy sector and how have big miners been affected?

The resource sector was described as looking shaky because oil prices fell and China showed signs of slowing, denting commodity demand. Oil sank about 3.8% in New York to an eight‑month low. The article reports BHP Billiton shares fell roughly 0.8% in New York and Rio Tinto’s US‑listed shares fell about 1.2% amid the weakness.

What should everyday investors be watching in this period of global economic uncertainty?

Based on the article, investors should monitor: the RBA cash rate decision and any cuts priced into the market; AUD movements against the US dollar; commodity and oil prices; economic data from the US and China; developments in Europe (including Greece and the eurozone debt situation); ASX200 performance; and property market indicators such as RP Data‑Rismark figures. The article highlights these factors as drivers of market volatility.