While the ramifications of the Eurozone’s debt concerns have heightened in recent weeks and with the euro finally coming in for a correction, the global investment risk research firm Check Risk has given Australia a better report in its latest weekly risk assessment.
Check Risk produced an update on the velocity of money in the Australian economy and said that it is “painting a pretty positive picture despite economists turning negative on the economy”.
The velocity of M3, the broadest measure of money supply, has been increasing since the end of 2011. The rate of acceleration has slowed but it is still growing, Check Risk says, and the Reserve Bank still has plenty of room to move with regard to monetary policy.
“Perhaps the biggest problem for Australian equity and bond markets is that the AUD is still not a buy. The AUD is likely to suffer from the double whammy of accommodative RBA monetary policy and weaker demand from China.
“Ultimately, investors in Australia are going to search for yield again … and given the corrections in the equity market and the pause that a weaker AUD has caused, the risk outlook for dividend-yielding stocks and government bonds is improving. It may be that these prices improve driven by domestic demand, as international investors are likely to remain wary as long as the AUD remains volatile.
“Global market risks are on the rise again having seen a swift correction at the end of May. Equity markets can move higher against this backdrop, however, the gap between bond and equity market risk perception should not be ignored.”
Check Risk says that a major risk is developing with bond and currency investors taking a very different view of risk to equity market investors, which was a pattern that developed in 2011. Such gaps in risk awareness tend to be asymmetric and can only be resolved by one or other group of investors being correct.
In 2011 US Treasury Bills went negative 11 times, which had until then been a one-in-30-year event. This month the spread between bond volatility and equity market volatility has widened to levels not seen since the fourth quarter of 2010.
“Of greater concern is that the rate of change has been similar to precedents seen in 2007 and 2008,” Check Risk says.