1301.0 - Year Book Australia, 2007

ARCHIVED ISSUE Released at 11:30 AM (CANBERRA TIME) 24/01/2007

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Contents >> 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

		2003-04	2004-05	2005-06
		$m	$m	$m

Funds (including equity) raised on conventional credit markets by
	Private non-financial corporations (b)	50,734	-11,030	112,686
	National public non-financial corporations	-2,084	385	756
	State and local public non-financial corporations	-764	5,402	3,914
	National general government	-1,816	373	1,926
	State and local general government	-2,027	-522	-1,970
	Households	118,884	104,124	107,686
	Total	162,927	98,732	224,998

(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

			2003-04	2004-05	2005-06
			$m	$m	$m

Households demand for credit			118,884	104,124	107,686
Housing			101,684	83,792	89,806
	Total Authorised Deposit-taking Institutions (ADIs)		69,023	55,136	58,985
		Owner-occupied housing	38,243	37,722	42,146
		Investment housing	30,780	17,414	16,839
	Other lenders		32,661	28,656	30,821
Non-Housing Borrowing			17,200	20,332	17,880

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)
		2003-04	2004-05	2005-06

All ordinaries
	Index(b)	3,530.3	4,229.9	5,034.0
	High(c)	3,549.0	4,275.6	5,352.1
	Low(c)	2,977.5	3,479.3	4,179.8
S&P/ASX 200		3,532.9	4,277.5	5,073.9
	Banks	4,932.7	5,570.0	6,522.1
	Industrials	5,829.3	6,824.7	7,618.2
	Resources	2,016.3	2,861.1	4,282.8

(a) Base 31 December 1979 = 500. (b) Share prices on joint trading floors; June closing value. (c) Over a twelve-month period ending 30 June.
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
	2004		2005		2006

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

Total equities and units in trusts	863,896	918,339	982,645	918,859	1,216,029	1,098,127

ISSUED BY

Private non-financial corporations	532,633	229,705	588,202	231,159	772,235	262,833
National public non-financial corporations(c)	63,522	5,152	62,963	5,629	45,792	5,781
State and local non-financial corporations(c)	-	100,307	-	94,936	-	85,330
Central bank(c)	-	12,514	-	11,241	-	12,685
Banks	182,703	6,519	216,970	6,496	254,508	7,402
Other depository corporations	321	36,776	415	38,983	634	41,574
Life insurance corporations	17,587	13,383	19,698	14,490	28,041	15,115
Other insurance corporations	22,234	19,108	28,279	22,592	32,290	24,213
Central borrowing authorities	-	30	-	30	-	30
Financial intermediaries	44,896	124,363	66,118	143,749	82,529	188,353
Rest of world	-	370,482	-	349,554	-	454,811

HELD BY

Private non-financial corporations	12,749	217,475	18,938	173,918	28,130	219,511
National public non-financial corporations	-	3,663	-	4,021	-	3,736
State and local public non-financial corporations	-	280	-	280	-	291
Banks	10,064	90,629	10,791	99,986	15,195	120,577
Other depository corporations	123	15,579	62	15,937	50	18,359
Life insurance corporations	57,472	57,504	69,233	60,012	76,202	67,021
Pension funds	132,378	175,945	166,002	209,987	208,028	265,982
Other insurance corporations	4,851	22,506	7,406	24,399	10,636	31,627
Financial intermediaries	77,806	56,354	101,989	54,611	164,318	75,740
National general government	32,425	17,968	32,618	17,186	23,723	18,797
State and local general government	-	101,940	-	99,000	-	90,178
Households	192,299	70,425	237,519	76,256	294,329	79,874
Rest of world	343,729	88,071	338,087	83,266	395,418	106,434

(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. Selected 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
	2004	2005	2006
	% p.a.	% p.a.	% p.a.

11:00 am call	5.25	5.50	5.75
Bank-accepted bills - 90 days	5.49	5.66	5.96

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

	2004	2005	2006
	$m	$m	$m

ISSUED BY

Private non-financial corporations	74,544	81,644	93,695
National public non-financial corporations	1,051	509	1,546
State and local public non-financial corporations	10	16	33
Banks	179,727	191,903	240,954
Other depository corporations	26,752	32,799	31,585
Life insurance corporations	1016	3	6
Other insurance corporations	352	416	452
Central borrowing authorities	7,162	6,968	6,373
Financial intermediaries n.e.c.	23,893	28,162	31,195
National general government	221	270	252
Households	12,667	15,223	17,618
Rest of world	4,035	2,167	3,605
Total	331,430	360,080	427,314

HELD BY

Private non-financial corporations	30,477	28,805	27,649
National public non-financial corporations	183	215	240
State and local public non-financial corporations	7	1	-
Central bank	4,262	4,718	13,902
Banks	91,404	98,197	120,313
Other depository corporations	34,301	38,089	32,118
Life insurance corporations	18,751	18,404	17,859
Pension funds	30,606	29,109	31,617
Other insurance corporations	6,878	8,859	10,175
Central borrowing authorities	15,133	20,567	16,261
Financial intermediaries n.e.c.	19,872	25,825	24,726
State and local general government	208	535	512
Households	8,269	8,878	8,701
Rest of world	71,079	77,878	123,241
Total	331,430	360,080	427,314

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 selected market yields at the end of June of the last three financial years for a range of bonds.

26.18 BOND MARKET, Market yields(a) - 30 June
		2004	2005	2006
		%	%	%

Treasury bonds
	3 years	5.43	5.10	5.78
	5 years	5.67	5.10	5.78
	10 years	5.87	5.11	5.79
New South Wales T-corp bonds
	3 years	5.70	5.33	6.01
	5 years	5.88	5.36	6.02
	10 years	6.05	5.39	6.05
Finance company debentures
	3 years	5.65	5.40	5.90

(a) Per annum

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. 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

		2004	2005	2006
		$m	$m	$m

ISSUED BY

Private non-financial corporations
	Issued in Australia	34,889	34,988	43,013
	Issued offshore	39,115	43,071	49,329
National public non-financial corporations
	Issued in Australia	3,039	3,754	3,244
	Issued offshore	9,231	9,658	9,481
State and local public non-financial corporations
	Issued in Australia	178	82	82
	Issued offshore	-	-	-
Banks
	Issued in Australia	32,016	49,425	76,904
	Issued offshore	125,092	146,674	179,302
Other depository corporations
	Issued in Australia	8,445	9,861	11,381
	Issued offshore	24,634	23,449	18,544
Life insurance corporation
	Issued in Australia	273	-	-
	Issued offshore	289	1,258	1,187
Other Insurance corporation
	Issued in Australia	117	328	242
	Issued offshore	2,227	3,029	2,972
Central borrowing authorities
	Issued in Australia	55,474	59,670	56,204
	Issued offshore	23,363	25,409	27,822
Financial intermediaries n.e.c.
	Issued in Australia	64,605	79,352	97,652
	Issued offshore	62,045	62,954	67,538
National general government
	Issued in Australia	62,765	63,491	63,796
	Issued offshore	1,106	1,074	878
State and local general government
	Issued in Australia	299	285	235
	Issued offshore	-	-	-
Rest of the world
	Issued in Australia	29,271	39,795	63,952
	Issued offshore	57,928	55,564	72,980
Total		636,401	713,171	846,738

HELD BY

Private non-financial corporations		7,587	7,892	10,298
National public non-financial corporations		122	20	15
State and local public non-financial corporations		56	81	42
Central bank		34,359	34,806	43,719
Banks		43,543	51,431	53,094
Other depository corporations		21,080	19,603	19,904
Life insurance corporations		40,079	42,128	46,216
Pension funds		54,487	61,178	75,475
Other insurance corporations		28,378	27,848	34,095
Central borrowing authorities		9,567	9,391	9,545
Financial intermediaries n.e.c.		35,849	46,272	63,451
National general government		3	-	13
State and local general government		655	704	2500
Households		6,773	7,169	9,385
Rest of world		353,863	404,648	478,986
Total		636,401	713,171	846,738

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 floated 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
	2004	2005	2006

United States of America dollar	0.6936	0.7659	0.7440
United Kingdom pound	0.3851	0.4254	0.4099
Japanese yen	75.46	85.04	86.08
Euro	0.5787	0.6379	0.5925


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)
		2003-04	2004-05	2005-06
		$m	$m	$m

Transactions by foreign exchange dealers(b)
	Outright spot(c)	43,759	38,582	53,693
	Outright forward(d)	7,614	7,903	11,881
	Swaps	82,309	87,179	108,089
	Options	7,162	3,199	3,236
	Total	140,844	136,863	176,898

(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.