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Phillip Gray is the editorial and communications manager and Donal Curtin is a consulting economist with Morningstar.
Outlook for investment markets
Growth assets have been boosted recently by the European Central Bank's move to buy Eurozone government bonds and the US Federal Reserve's decision to embark on more quantitative easing.
Both policies improve the immediate prospects for global economic activity. Although the best bet is that the world economy will trundle along, there are nonetheless downside risks, especially politicians' abilities to fix debt and deficit issues in the US and the Eurozone. Local markets look like relative havens from global risks.
Australian cash and fixed interest - review
Australian short-term interest rates have held steady, 90-day bank bill yields at just under 3.60 percent. Longer-term rates have followed the global pattern of reacting to switches in investor sentiment. The yield on 10-year Commonwealth bonds got as low as 2.96 percent on 5 September before the European Central Bank and US Federal Reserve weighed in with their policy moves, and like bond markets overseas, Australia has since picked up to 3.35 percent. Other long-term rates have behaved similarly, the three-year swap rate rising from 3.10 to 3.30 percent. Swings in investor sentiment have also been the driver of the exchange rate. The $A has tended to rise when global markets are more relaxed, and sell off when they have been more worried.
When shares globally were on the slide, the $A dropped to $US1.02 on 5 September, but when the central banks made their announcements, the $A rose strongly to $US1.058 by 14 September. Much of this rise merely reflected the weakness of the $US - the Fed's massive monetary easing was seen as bad news for the long-term value of the $US, which on a trade-weighted basis has fallen sharply. Even so, there was more to the $A's rise than just $US weakness, the overall value of the $A rising slightly during September.
Australian cash and fixed interest - outlook
The stability of short-term interest rates comes as no surprise: the Reserve Bank of Australia left rates unchanged at its September Board meeting. The Bank did not give much away about its future intentions, appearing reasonably happy with the outlook for inflation (although warning that domestic costs would need to be kept under control), and noting that the economy was growing at close to its average rate, but was worried that "global GDP will grow at no more than average pace in 2012, with risks to the outlook still on the downside". In the more detailed Board minutes released later in the month, however, the Bank referred to "scope to adjust policy in response to any significant deterioration in the outlook for growth". Markets have picked up on the potential need to have to respond to weaker growth, and currently expect that the Bank will have to ease monetary policy a bit, anticipating one 0.25 percent interest rate cut later this year and another in early 2013.