1301.0 - Year Book Australia, 2006

ARCHIVED ISSUE Released at 11:30 AM (CANBERRA TIME) 20/01/2006

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Contents >> Chapter 26 - Financial system >> Financial markets

FINANCIAL MARKETS

Financial markets are used by participants to either raise funds (e.g. by issuing securities) or invest savings (by buying securities and other financial assets). The major markets in the Australian financial system include the share market, bond market and money market. Descriptions and tables indicating prices and activity in various financial markets are provided in this section.

A significant influence in financial markets is the participation of institutional investors controlling large pools of investment funds. These pools are accumulated by collective investment institutions and are often managed on a fee-for-service basis by investment managers. A summary of the activities of these institutions is also provided.

CREDIT MARKET

Credit may be defined broadly as funds provided to those seeking to borrow. However, analytically useful measures of credit usually exclude borrowings by financial enterprises because their main role is as an intermediary, that is, they borrow in order to lend. Also, lending and borrowing between enterprises which have a special relationship, such as between companies in the same group or between government agencies, are often excluded from credit measures because transactions between these bodies frequently are of a non-market nature. Similarly, some types of financial instrument, such as trade debts, are not considered to be part of an organised market. All of these types of transactions are omitted from table 26.12, which presents a summary of the demand for credit in Australia by the non-financial sectors. It includes raisings by the issue of both debt and equity securities.

26.12 DEMAND FOR CREDIT(a)
		Net transactions during year

		2002-03	2003-04	2004-05
		$m	$m	$m

Funds (including equity) raised on conventional credit markets by
	Private non-financial corporations	50,890	55,510	(b)3,934
	National public non-financial corporations	-3,356	-2,084	397
	State and local public non-financial corporations	2,106	-764	5,048
	National general government	-5,358	-3,953	-2,466
	State and local general government	-350	-1,902	-621
	Households	98,456	115,328	103,391
	Total	142,388	162,135	(b)109,683

(a) Positive numbers indicate an increase in raisings. Negative numbers indicate repayment or redemption. (b) Aggregates impacted by large corporate restructuring transactions. Source: Australian National Accounts: Financial Accounts (5232.0).

The strong demand for credit by households is a result of borrowing for housing. Table 26.13 shows the components of household borrowings.

26.13 HOUSEHOLD DEMAND FOR CREDIT
		Net transactions during year

			2002-03	2003-04	2004-05
			$m	$m	$m

Households demand for credit			98,456	115,328	103,391
Housing			78,313	96,365	82,139
	Total Authorised Deposit-taking Institutions (ADIs)		62,580	66,071	54,523
		Owner-occupied housing	35,533	36,556	38,135
		Investment housing	27,047	29,515	16,388
	Other lenders		15,733	30,294	27,616
Non-Housing Borrowing			20,143	18,963	21,252

Source: Australian National Accounts:Financial Accounts(5232.0); Housing Finance (5609.0).

STOCK MARKET

The stock market is a mechanism for trading equities (shares), units in trusts, options, and some fixed-interest securities.

Operated nationally by the ASX, which is responsible for the day-to-day running and surveillance of trading, the Australian system is electronic and conducted using the Stock Exchange Automated Trading System, allowing buyers and sellers to be located anywhere in the country.

The ASX classifies listed companies according to their major activity and produces indexes based on these classifications. Table 26.14 summarises the performance of the major indexes over the last three financial years.

26.14 AUSTRALIAN STOCK MARKET INDEXES(a)
		2002-3	2003-04	2004-05

All ordinaries
	Index(b)	2,999.7	3,530.3	4,229.9
	High(c)	3,205.4	3,549.0	4,275.6
	Low(c)	2,673.3	3,266.8	3,868.5
S&P/ASX 200		3,026.0	3,532.9	4,277.5
	Banks	4,877.0	4,932.7	5,570.0
	Industrials	5,159.0	5,829.3	6,824.7
	Resources	1,439.0	2,016.3	2,861.1

(a) Base 31 December 1979 = 500. (b) Share prices on joint trading floors; June closing value. (c) Over a 12-month period. Source: Australian Stock Exchange; Reserve Bank of Australia; Standard and Poor's.

Table 26.15 shows the market value of Australian shares and units in trusts on issue - both listed and unlisted. It shows the amount on issue by sector of issuer and sector of holder of equities and units.

26.15 EQUITY MARKET(a), Amounts on issue - 30 June
	2003		2004		2005

	Listed	Unlisted	Listed	Unlisted	Listed	Unlisted
	$m	$m(b)	$m	$m(b)	$m	$m(b)

Total equities and units in trusts	703,745	785,514	863,896	896,962	982,646	897,428

ISSUED BY

Private non-financial corporations	410,984	202,915	532,633	218,873	588,202	219,659
National public non-financial corporations(c)	56,615	4,908	63,522	5,152	62,964	5,629
State and local non-financial corporations(c)	-	92,062	-	100,307	-	94,936
Central bank(c)	-	11,678	-	12,514	-	11,241
Banks	174,075	6,792	182,703	6,400	216,970	8,433
Other depository corporations	311	33,900	321	36,776	415	38,644
Life insurance corporations	11,366	13,583	17,587	13,383	19,698	14,632
Other insurance corporations	14,894	16,120	22,234	19,108	28,279	22,592
Central borrowing authorities		30		30		30
Financial intermediaries	35,500	108,748	44,896	126,465	66,118	139,048
Rest of world	-	294,778	-	357,954	-	342,584

HELD BY

Private non-financial corporations	7,198	191,774	12,749	222,907	18,288	173,672
National public non-financial corporations	-	4,906	-	3,663	-	3,452
State and local public non-financial corporations	-	279	-	282	-	280
Banks	10,466	74,206	10,064	78,011	10,791	82,152
Other depository corporations	353	15,954	123	15,579	92	15,925
Life insurance corporations	47,788	53,826	56,690	57,721	67,473	57,247
Pension funds	118,007	113,149	148,044	145,966	185,182	178,931
Other insurance corporations	3,562	18,502	4,851	21,024	7,406	22,286
Financial intermediaries	48,620	47,030	75,661	56,355	100,489	64,866
National general government	28,365	16,881	32,425	17,968	32,635	17,168
State and local general government	-	91,655	-	101,940	-	99,000
Households	145,398	87,580	177,889	87,180	224,710	88,604
Rest of world	293,988	71,067	345,400	88,366	335,620	93,827

(a) Includes units in trusts. (b) The unlisted estimated market values are considered to be of poor quality unless based on net asset values. They should be used with caution. (c) Net asset values. Source: Australian National Accounts: Financial Accounts (5232.0).

MONEY MARKET

Liquidity management by Australian corporations, financial institutions and governments is conducted through an informally arranged market for deposits, loans and placements and by issuance, purchase and sale of short-term debt securities. Rates in the market at end June of the last three financial years are shown in table 26.16.

26.16 SHORT-TERM MONEY MARKET RATES - 30 June
	2003	2004	2005
	% p.a.	% p.a.	% p.a.

11 am call	4.75	5.25	5.50
Bank-accepted bills - 90 days	4.67	5.49	5.66

Source: Reserve Bank of Australia.

Money market securities have an original term to maturity of less than one year, often 30, 90 or 180 days. They are issued by borrowers at a discount to face value and carry no income payment other than the repayment of face value at maturity. To enhance liquidity, money market securities conform to standardised attributes concerning risk and discount rates. Because of the standardisation, the securities of different issuers are often combined in the one parcel of securities for trading purposes. There are two types of securities: bills of exchange and one name paper (promissory notes, treasury notes, commercial paper and bank certificates of deposit), both of which are covered by the Bills of Exchange Act 1909 (Cwlth). The risk of default of a bill of exchange is reduced by an acceptor or endorser adding their name to the security for a fee. Most bills of exchange traded in the market are bank-accepted bills. Promissory notes are issued by institutions whose credit worthiness is equal to or better than banks; they are not accepted by a bank and unlike bills of exchange they are not endorsed by the parties which sell them in the market. The Australian Government issues treasury notes, state governments and large corporations issue commercial paper and banks issue negotiable certificates of deposit. Table 26.17 shows the amount on issue by sector of issuer and sector of holder of the various types of money market securities.

26.17 SHORT-TERM DEBT SECURITIES
	Amounts outstanding at 30 June

	2003	2004	2005
	$m	$m	$m

ISSUED BY

Private non-financial corporations	74,353	75,562	80,413
National public non-financial corporations	1,063	1,051	504
State and local public non-financial corporations	2	10	16
Banks	136,986	179,727	191,903
Other depository corporations	36,929	26,752	33,296
Life insurance corporations	4	1,016	808
Other insurance corporations	212	336	424
Central borrowing authorities	8,650	7,162	6,968
Financial intermediaries n.e.c.	23,771	25,985	29,874
National general government	246	221	270
Households	10,537	12,667	15,223
Rest of world	2,863	4,019	2547
Total	295,616	334,508	362,246

HELD BY

Private non-financial corporations	27,823	30,447	26,407
National public non-financial corporations	495	183	215
State and local public non-financial corporations	36	7	1
Central bank	548	4,262	4,718
Banks	72,676	90,873	97,612
Other depository corporations	39,187	36,429	43,089
Life insurance corporations	17,930	18,650	18,895
Pension funds	26,076	35,119	33,870
Other insurance corporations	7,097	6,860	8,624
Central borrowing authorities	12,118	15,154	21,272
Financial intermediaries n.e.c.	17,177	19,007	26,015
State and local general government	209	208	335
Households	8,335	7,401	8,625
Rest of world	65,909	69,908	72,568
Total	295,616	334,508	362,246

Source: Australian National Accounts: Financial Accounts (5232.0).

BOND MARKET

Bonds are issued with original terms to maturity of one or more years. Usually the investors are paid a set periodic interest, called a coupon, for the life of the bond and receive their initial investment back at maturity. Some bonds have variable interest rates, some have principal repayments indexed, and there are small amounts of zero-coupon or deep discount securities which are issued at a discount to face value. Governments, trading enterprises and financial institutions issue bonds to finance long-term requirements. For these entities, the bond market generally provides a cheaper source of funds than borrowing from banks and other financial institutions. Table 26.18 shows the market yields at the end of June of the last three financial years for a range of bonds.

26.18 BOND MARKET, Market yields - 30 June
		2003	2004	2005
		% p.a.	% p.a.	% p.a.

Treasury bonds
	3 years	4.47	5.43	5.10
	5 years	4.71	5.67	5.10
	10 years	5.01	5.87	5.11
New South Wales T-corp bonds
	3 years	4.64	5.70	5.33
	5 years	4.89	5.88	5.36
	10 years	5.20	6.05	5.39
Finance company debentures
	2 years	4.10	5.55	5.35
	3 years	4.20	5.65	5.40

Source: Reserve Bank of Australia.

Historically, the main issuers of bonds have been the Australian Government and state governments, the latter through their central borrowing authorities. Corporate bonds are issued only by very large private trading and financial enterprises. In recent years banks and asset-backed security trusts have issued increasing amounts as government issuance has decreased (see the article Kangaroo bonds in the International accounts and trade chapter for more information). The amounts outstanding on bonds at end June of the last three financial years are shown in table 26.19.

26.19 BONDS
		Amounts outstanding at 30 June

		2003	2004	2005
		$m	$m	$m

ISSUED BY

Private non-financial corporations
	Issued in Australia	22,345	24,878	35,497
	Issued offshore	39,071	41,324	44,321
National public non-financial corporations
	Issued in Australia	3,013	3,039	3,754
	Issued offshore	9,972	9,231	9,658
State and local public non-financial corporations
	Issued in Australia	7	2	2
	Issued offshore	-	-	-
Banks
	Issued in Australia	23,401	32,015	49,468
	Issued offshore	90,507	125,092	146,674
Other depository corporations
	Issued in Australia	8,471	8,445	9,452
	Issued offshore	24,201	24,634	22,226
Other insurance corporations
	Issued in Australia	1,256	273	-
	Issued offshore	633	289	240
Life insurance corporations
	Issued in Australia	433	133	340
	Issued offshore	2,380	2,227	3,141
Central borrowing authorities
	Issued in Australia	56,674	55,474	59,769
	Issued offshore	18,924	23,363	25,409
Financial intermediaries n.e.c.
	Issued in Australia	51,645	62,959	75,663
	Issued offshore	43,290	59,836	59,721
National general government
	Issued in Australia	65,121	59,923	57,878
	Issued offshore	1,405	1,107	1,078
State and local general government
	Issued in Australia	303	299	285
	Issued offshore	-	-	-
Rest of the world
	Issued in Australia	12,616	28,243	35,908
	Issued offshore	64,653	70,993	69,890
Total		540,321	633,779	710,374

HELD BY

Private non-financial corporations		5,817	5,754	6,107
National public non-financial corporations		124	122	20
State and local public non-financial corporations		44	45	51
Central bank		41,749	32,251	30,290
Banks		34,852	40,546	47,897
Other depository corporations		18,780	15,693	13,997
Life insurance corporations		42,558	40,793	47,383
Pension funds		55,983	67,003	73,553
Other insurance corporations		29,025	26,835	27,684
Central borrowing authorities		9,395	9,567	9,091
Financial intermediaries n.e.c.		21,296	28,462	38,229
National general government		22	3	-
State and local general government		575	655	704
Households		5,460	6,673	6,669
Rest of world		274,641	359,377	408,699
Total		540,321	633,779	710,374

Source: Australian National Accounts: Financial Accounts (5232.0).

FOREIGN EXCHANGE MARKET

The foreign exchange market is the means whereby currencies of different countries can be bought and sold. In October 1983, the Australian Government decided to float the Australian dollar, allowing its value to be determined by market forces with few exchange controls and little Reserve Bank intervention. Prior to 1983, the Australian dollar was pegged to a basket of currencies. The currencies in the basket were weighted according to their trading significance to Australia. Table 26.20 shows the value of the Australian dollar against major currencies at end June of the last three financial years.

26.20 VALUE OF AUSTRALIAN DOLLAR, Against major currencies - At last trading day in June
	2003	2004	2005

United States of America dollar	0.6700	0.6936	0.7659
United Kingdom pound	0.4047	0.3851	0.4254
Japanese yen	80.44	75.46	85.04
Euro	0.5907	0.5787	0.6379

Source: Australian Tax Office.

Currencies are traded for many reasons: because of exporting or importing requirements, investing or borrowing overseas, arbitraging (i.e. taking advantage of short-term discrepancies in rates) or speculating on possible exchange rate movements with a view to making a profit. Table 26.21 shows daily averages of foreign exchange turnover against all currencies.

26.21 FOREIGN EXCHANGE TURNOVER AGAINST ALL CURRENCIES, Daily averages(a)
		2002-03	2003-04	2004-05
		$m	$m	$m

Transactions by foreign exchange dealers(b)
	Outright spot(c)	30,384	39,440	36,648
	Outright forward(d)	7,424	7,675	7,446
	Swaps	68,014	78,190	85,578
	Options	6,298	7,233	3,459
	Total	112,120	132,538	133,131

(a) Figures given are the average daily turnover for the financial year. (b) Australian banks and non-bank financial intermediaries authorised to deal in foreign exchange. (c) An outright spot transaction is one for receipt or delivery within two business days. (d) An outright forward transaction is one for receipt or delivery in more than two business days. Source: Reserve Bank of Australia.