The third quarter of 2014 saw markets continue to recover from their early weakness at the beginning of the year, despite a flat start in July. North American and Asia Pacific share markets experienced strong quarters, however regional geopolitical tensions and un-inspiring data depressed investor sentiment in the Euro-zone. Commodity markets had a mixed quarter as weak August data out of China and the Indonesian export ban weighed on metals, while sensitivity to the Russia-Ukraine conflict was reflected in wheat pricing. Crude prices declined steadily throughout the quarter, reaching a two year low by the end of September and the AUD was the second weakest G10 currency in September due to weaker China data and rising global growth concerns. Global bond yields were helped higher by abating geopolitical concerns, and the US Federal Reserve delivering a modestly upbeat assessment of the US economy whilst indicating that normalisation of interest rate policy was more data dependant.
In Australia, the Reserve Bank of Australia (RBA) left cash rates on hold at 2.5 per cent throughout the third quarter of 2014. In July, RBA Governor Stevens enhanced their efforts to talk the currency downward. Australia’s terms of trade worsened as the drop in export prices exceeded the drop in import prices. August saw the Governor discuss currency intervention, noting that it was an option on the table, despite the fresh talk of intervention from the head of the RBA, solid domestic data kept AUD well supported throughout the month. However, disappointing reads on the Chinese economy, concerns over the current global geopolitical climate and improving US domestic data in September, saw a dramatic fall in the AUD of -6.4 per cent.
The European Central Bank (ECB) left their key interest rates unchanged through July and August, however President Draghi increased the likelihood of additional ECB policy easing at the August FOMC meeting, acknowledging the sharp drop in inflation expectations. Market commentators are concerned with the economic impacts of geopolitical tensions in Ukraine on the Euro-area and the likelihood of downside risk to growth. At the September meeting the ECB cut all the key rates by 10 basis points. They also announced a purchase of asset backed securities and covered bonds, with details to come in October.
The Bank of Japan (BoJ) left its monetary policy stance unchanged at their July meeting, maintaining their monetary policy statement’s positive outlook for both growth and prices. Monetary policy stance remained unchanged through August, but a larger-than-expected drop in GDP growth in response to the consumption tax hike and a further widening in the trade deficit increased pressure on the BoJ to revise its outlook. By September slowing domestic data prompted concern around further BoJ easing, and expectations of impending Government Pension Investment Fund reform, contributed to a weaker JPY which tested levels not seen since 2008.
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