The Australian share market gave back its gains from October, falling 3.8% in November to close the month at 5,298 points. Australian equities underperformed global equities, largely on the back of falling commodity prices, although further political uncertainty didn't help matters.
Global shares across the board were generally stronger in the month, with the US Dow Jones Index gaining 2.5%, the London FTSE gaining 2.7%, the Hong Kong Hang Seng Index flat and the Japan Nikkei 225 Index gaining 6.5% for November.
As has been noted within the media, oil prices are in a very rapid decline (see chart below).
The decline in oil prices is partly because of a recovery in the US dollar. However, most of the decline in prices is due to a sudden lift in supply following improved techniques to extract oil from shale in the US and the emergence of a global gas industry.
While the media will focus on cheaper petrol for motorists (and how this is not being passed onto consumer at the bowser), any significant market price shift does have consequences that can lead to volatility in financial markets (such as concerns over debt defaults for oil rich sovereign governments and corporations).
What is happening on global oil markets has also been replicated in other commodities. The charts below show the historical price for Iron Ore and Australian thermal coal.
The steady price declines in these commodities is not good news for Australia. Iron Ore and Coal are Australia's two largest exports (and by quite a measure, accounting for more than one third of total exports). Add to this a sharp decline in Oil prices (thereby making fuel sources like coal and gas less competitive), the Australian economy is now facing a significant erosion of our national income.
Any erosion of income will directly hits tax receipts and have a serious impact on the Federal Budget (as expected to be confirmed when Treasurer Joe Hockey provides his MYEFO update in a couple of weeks time). According to the Parliamentary Budget Office, the collapse in commodity prices will slice $7 billion from income this financial year alone!
Add to this a Senate that is starting to look more shambolic than ever before (vis-à-vis the Palmer United Party fractioning in the month and reversing legislative changes that they passed only a few months ago) there are certainly some headwinds to address in 2015 for the Australian economy.
Thankfully, the global outlook is brighter with the US (in particular) continuing to recover well following the Global Financial Crisis. There are also strong arguments to suggest that the prices of Australian shares are already discounted for low commodity prices (and any reversal in these prices will lead to share price gains).
The RBA kept interest the cash rate on hold in November at 2.50% per annum. The RBA board meet again tomorrow with no change expected (especially in context of the above issues) before breaking until February 2015.
In currency news, the Australian Dollar declined by 3.2% in the month of November and is currently buying 85.11 US cents.
For more information please contact Ryan Love on 1300 856 338 or e-mail ryan.love@apexpartners.com.au.
This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.