The past three months has seen a further fall in financial markets, followed by a very strong rally that saw U.S. markets produce their best monthly return since 1933. This rally was initially sparked by more optimistic outlooks from the major U.S. banks and was perpetuated by the release of the ‘Legacy Asset Program’ by the U.S. Treasury, which was generally well received. A similar rally occurred in the Australian market, and in most other major world markets, which in the current environment are closely correlated with moves in the U.S. This rally also saw a strong upward movement in the Australian dollar as commodity prices also started to rise and the RBA continued to keep rates on hold.

The Federal budget, released on 12 May, contained a combination of cost saving and stimulus measures designed to help the economy to move forward again, while at the same time attempting to reduce so called ‘Middle Class Welfare’. As widely flagged in the press leading up to budget night the concessional contribution caps were halved effective from 1 July 2009 and the Government Co Contribution was ‘temporarily’ reduced to 100 per cent from 150 per cent. The reduction in contribution caps means that previous strategies of making large contributions to super towards the end of a person’s working life will need to be rethought. For those who were taking advantage of salary sacrifice arrangements at the old rates a review of contribution levels should be conducted to ensure that the new caps are not exceeded in the 2010 financial year.

While there is still a long road ahead many economists are now pointing to a variety of small indicators showing that many world economies may be starting to stabilise and begin recovering later this year, before building into early 2010.  In Australia there has been renewed interest and higher clearance rates in the residential property market, loan applications are on the rise and consumer sentiment appears to also be increasing. The recent Westpac-Melbourne Institute survey of consumer sentiment rose 8.7per cent, which was the highest jump since August 2007. It was also noted that the average level of consumer sentiment over the last six months was 4.4 per cent higher than the average level of the previous six months.

With general sentiment starting to become more positive and stimulus measures in the Budget to begin working their way through the system, hopefully we will continue to see more of these indicators improving over the coming months.

Daniel Minihan
Director
dminihan@moorestephens.com.au