Sydney, NSW -- (SBWire) -- 06/23/2009 -- May was yet another good month for global share markets as investor optimism continued to improve on expectations that the worst of the global financial crisis is now behind us. In Australia, the local market posted its third consecutive monthly gain after a series of better-than-expected data.

The rally continues

The rally in global share markets that started in early March continued throughout May as bourses the world over made further gains during the month. The catalyst for the rally was once again a jump in investor optimism as signs continued to point to the end of the bear market that began back in November 2007.

The US market – the world’s largest and most influential – has continued to trend upward in recent months by setting a series of lower lows. It closed the month up 5.3% and this had a positive knock-on effect elsewhere, with indices in the UK (+4.1%), Europe (+3.2%) and Japan (+7.9%) also closing the month higher.

Federal Budget

On 8 May, Treasurer Wayne Swan delivered his second Federal Budget and with it the biggest Budget deficit in Australian history - $57.6 billion. It was also the first Budget to include a forecast of negative growth, with GDP expected to fall by 0.5% in 2009-10 after zero growth in the current fiscal year.

Hoping to ease the impact of recession and limit further unemployment, the Government announced a $22 billion spend on infrastructure, including roads, rail and ports, broadband and energy efficiency. There were also proposed changes to the Australian superannuation industry – including halving the maximum limit on concessional contributions – private health insurance and an extension of the Government’s first home owners' grant.

BT's Chief Economist, Dr Chris Caton, has produced a detailed analysis of the May Federal Budget which you can view on our website at http://www.bt.com.au.

Australian share market gains 1.4%

The Australian share market posted its third consecutive gain in May, with the S&P/ASX 200 Accumulation Index up 1.4% on the back of a string of better-than-expected economic data and yet another good lead from the US.

Australian hits US$0.80 cents

The Australian dollar gained over 10% against the US dollar (US$) in May, closing the month at US$0.8010 cents thanks mainly to higher commodity prices and renewed US$ weakness. The local currency has now risen 33% since its recent low of US$0.6018 cents set in October last year.

After such a strong rally, it's inevitable that we’ll see some sort of correction in the A$ in the near-term, though it's possible that we could see it go as high as US$0.8500 cents by year’s-end. If that were to happen, it would naturally reduce the cost of imported goods and, by default, inflation. However, it would also weigh on the profits of companies with overseas interests as well as hinder Australia’s economic recovery.

Looking ahead

The global economy is expected to remain weaker in the near-term, though we don't see this as any sort of reflection on financial markets. Our view is that we have seen the worst of the current downturn and that global markets will recover quickly, especially as government stimulus packages begin to take effect. In fact, we've already seen evidence of a major shift in investor optimism in recent months as global share markets begin to show signs of a sustained recovery.

The Australian economy is currently in the midst of a mild recession, though it continues to perform relatively well compared to many of its global counterparts, including the US and Europe. There is growing confidence amongst investors that the local share market has already seen the low point of the current cycle. We believe this to be the case, though we still expect share markets to remain volatile in the near-term. Importantly, Australian shares continue to trade at historically low levels, and it remains our view that they represent good value for investors with a long-term investment horizon.

In terms of interest rates, it’s clear that the RBA maintains its easing bias, i.e. it’s more likely to cut rates than raise them, and unless there's any significant deterioration in the economic outlook we would expect the Bank to leave rates unchanged for the foreseeable future.