International Economic Overview

Some stabilisation in Europe’s debt crisis, receding fears about a “hard” landing in China and solid US and European economic data have all contributed to an improvement in investors’ risk appetite. World equity markets rallied, global commodity prices have risen, and risk seeking investors have increasingly spurned the relative “safe-haven” of the US Dollar and Japanese Yen in favour of high beta “risk sensitive” curren­cies like the Australian Dollar.

Recent activity readings have generally surprised to the upside. The Euro area economy is now expected to stabilise in the March quarter 2012. These changes reinforce the message that downside risks have receded—particularly risks that the Euro area would contract sharply or experience a bank funding crisis. However, there remain material constraints on global growth this year that curb any enthusiasm to ex­trapolate recent upside surprises. Global growth will rise, but in a gradual and bumpy manner.

Mixed signals on the trajectory of global growth contrast with the unambiguous shift toward easing by central banks. The US Federal Reserve extended its low rate guidance from mid-2013 to late 2014, and the Chairman signalled willingness to engaging in further asset purchases.

The European Central Bank (ECB) has shied away from QE, and has focused instead on providing adequate liquidity to the banking system. The nature of this provisioning changed dramatically in December with the unprecedented 3-year Longer Term Refinancing Operations (LTRO) worth €489 billion (net €210 bil­lion). With a second such operation scheduled for February 28, this will produce a major expansion of its balance sheet and is very supportive for the European Banking system and for markets.

Meanwhile, policy loosening has begun in China, with an easing in the banks’ reserve requirements (and a further cut anticipated before the end of the March quarter) and some easing of property policy. The policy easing will support an economic recovery, particularly in the second half of 2012, and GDP growth of 8-8.5% in the year as a whole.

Ausbil Dexia Limited

Indices:

The All Ordinaries Index has moved up over the past week increasing 109 points (or +2.5%) since closing last Friday to 02:50 pm this Friday.

                                                                                                                                      

The rest of the world as measured by the MSCI index is up 5 points (or +0.4%) from closing last Friday to end of trade Thursday.