1301.0 - Year Book Australia, 2005

ARCHIVED ISSUE Released at 11:30 AM (CANBERRA TIME) 21/01/2005

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Contents >> Financial system >> 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

		2001-02	2002-03	2003-04
		$m	$m	$m

Funds (including equity) raised on conventional credit markets by
	Private non-financial corporations	27,577	37,214	56,134
	National public non-financial corporations	1,191	-2,520	-2,070
	State and local public non-financial corporations	1,931	2,298	-941
	National general government	-2,615	-5,169	-3,814
	State and local general government	-1,281	-166	-2,008
	Households	79,099	93,679	115,964
	Total	105,902	125,336	163,265

(a) Positive numbers indicate an increase in raisings. Negative numbers indicate repayment or redemption. Source: Australian National Accounts: Financial Accounts (5232.0).

Table 26.13 shows the growth in household borrowings. The significant growth in demand for credit by households is largely a result of increased borrowing for housing.

26.13 HOUSEHOLD DEMAND FOR CREDIT
				Net transactions during year

				2003	2004
				$m	$m

Households demand for credit				93,679	115,964
	Housing			78,102	95,129
		Total Authorised Deposit-taking Institutions (ADIs)		62,767	65,153
			Owner-occupied housing	35,720	35,682
			Investment housing	27,047	29,471
		Other lenders		15,335	29,976
	Non-housing borrowing			15,577	20,835

Source: Housing Finance, Australia (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 past three financial years.

26.14 AUSTRALIAN STOCK MARKET INDEXES(a)
		2001-02	2002-03	2003-04

All ordinaries
	Index(b)	3,163.2	2,999.7	3,530.3
	High(c)	3,440.0	3,205.4	3,549.0
	Low(c)	2,867.5	2,673.3	3,266.8
S&P/ASX 200		3,216.0	3,026.9	3,532.9
	Banks	5,095.8	4,877.2	4,932.7
	Industrials	5,445.7	5,159.0	5,829.3
	Resources	1,576.0	1,439.1	2,016.3

(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
	2002		2003		2004

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

Total equities and units in trusts	731,671	732,534	704,492	752,226	864,547	848,790

ISSUED BY

Private non-financial corporations	429,590	177,946	412,544	194,871	540,040	206,462
National public non-financial corporations(c)	59,960	4,854	56,615	4,908	63,522	5,152
State and local non-financial corporations(c)	-	92,131	-	92,062	-	100,307
Central bank(c)	-	11,399	-	11,678	-	12,514
Banks	181,323	8,624	174,080	6,792	182,710	6,399
Other depository corporations	227	25,071	363	33,900	389	36,758
Life insurance corporations	22,457	14,143	11,336	13,583	17,587	13,383
Other insurance corporations	8,905	16,883	14,896	16,120	22,,234	19,108
Central borrowing authorities	-	87	-	30	-	30
Financial intermediaries	29,209	103,400	34,658	108,748	38,065	126,465
Rest of world	-	277,996	-	269,534		322,212

HELD BY

Private non-financial corporations	8,395	159,414	7,198	165,371	12,749	186,856
National public non-financial corporations	-	6,647	-	3,635	-	3,702
State and local public non-financial corporations	-	310	-	279	-	282
Banks	8,812	66,444	10,466	74,206	10,064	78,308
Other depository corporations	-	10,506	353	15,954	123	14,469
Life insurance corporations	58,789	48,687	48,049	54,122	55,857	58,961
Pension funds	104,879	110,988	111,117	113,698	142,409	144,294
Other insurance corporations	4,440	19,705	3,562	17,354	4,851	19,547
Financial intermediaries	61,350	46,105	52,717	49,888	76,317	61,394
National general government	30,040	16,541	28,365	16,881	31,222	17,968
State and local general government	-	92,371	-	91,655	-	101,940
Households	167,757	88,808	145,410	83,312	182,168	79,999
Rest of world	287,209	65,966	297,255	65,865	348,787	81,080

(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 cautiously. (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 past three years are shown in table 26.16.

26.16 SHORT-TERM MONEY MARKET RATES - 30 June
	2002	2003	2004
	% p.a.	% p.a.	% p.a.

11 am call	4.72	4.75	5.25
Bank-accepted bills-90 days	5.07	4.67	5.49

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 - 30 June
	2002	2003	2004
	$m	$m	$m

ISSUED BY

Private non-financial corporations	77,436	74,657	75,176
National public non-financial corporations	2,637	2,104	2,374
State and local public non-financial corporations	-	2	10
Banks	102,938	136,440	179,835
Other depository corporations	51,580	37,063	26,501
Life insurance corporations	452	4	1,336
Other insurance corporations	62	121	186
Central borrowing authorities	8,643	8,650	6,905
Financial intermediaries n.e.c.	22,799	23,431	26,533
National general government	4,477	246	221
Households	8,923	10,537	12,667
Rest of world	2,690	2,912	3,858
Total	282,637	296,167	335,602

HELD BY

Private non-financial corporations	20,249	27,405	29,116
National public non-financial corporations	797	495	183
State and local public non-financial corporations	126	36	7
Central bank	1,897	549	4,619
Banks	70,312	73,538	91,933
Other depository corporations	34,464	39,057	38,562
Life insurance corporations	15,810	17,916	18,634
Pension funds	17,165	22,060	26,040
Other insurance corporations	5,526	7,101	6,968
Central borrowing authorities	9,909	11,818	14,666
Financial intermediaries n.e.c.	17,483	15,635	18,502
State and local general government	533	209	208
Households	8,586	8,557	8,007
Rest of world	79,780	71,791	78,157
Total	282,637	296,167	335,602

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 30 June of the past three years for a range of bonds.

26.18 BOND MARKET, Market yields - 30 June
		2002	2003	2004
		% p.a.	% p.a.	% p.a.

Treasury bonds
	3 years	5.61	4.47	5.43
	5 years	5.78	4.71	5.67
	10 years	5.99	5.01	5.87
New South Wales T-corp bonds
	3 years	5.79	4.64	5.70
	5 years	6.04	4.89	5.88
	10 years	6.29	5.20	6.05
Finance company debentures
	2 years	5.45	4.10	5.55
	3 years	5.60	4.20	5.65

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 30 June of the past three years are shown in table 26.19.

26.19 BONDS, Amounts outstanding - 30 June
		2002	2003	2004
		$m	$m	$m

ISSUED BY

Private non-financial corporations
	Issued in Australia	17,864	22,094	23,817
	Issued offshore	32,704	37,438	36,026
National public non-financial corporations
	Issued in Australia	4,976	3,013	3,039
	Issued offshore	10,708	9,972	9,424
State and local public non-financial corporations
	Issued in Australia	2	8	2
	Issued offshore	-	-	-
Banks
	Issued in Australia	26,735	23,205	31,915
	Issued offshore	87,827	90,507	127,022
Other depository corporations
	Issued in Australia	11,587	8,471	8,442
	Issued offshore	15,269	24,201	23,611
Other insurance corporations
	Issued in Australia	127	423	117
	Issued offshore	1,817	1,861	1,548
Life insurance corporations
	Issued in Australia	1,255	1,257	959
	Issued offshore	975	633	385
Central borrowing authorities
	Issued in Australia	52,998	56,674	55,474
	Issued offshore	17,513	18,924	23,363
Financial intermediaries n.e.c.
	Issued in Australia	42,529	51,645	62,896
	Issued offshore	37,914	46,106	61,878
National general government
	Issued in Australia	64,155	65,120	59,831
	Issued offshore	1,449	1,439	1,234
State and local general government
	Issued in Australia	306	304	300
	Issued offshore	-	-	-
Rest of the world
	Issued in Australia	10,776	12,616	29,190
	Issued offshore	54,205	58,001	56,883
Total		493,691	533,912	617,356

HELD BY

Private non-financial corporations		7,155	5,818	5,690
National public non-financial corporations		372	124	122
State and local public non-financial corporations		71	26	28
Central bank		38,056	41,749	31,668
Banks		31,708	34,960	42,645
Other depository corporations		20,047	16,627	12,718
Life insurance corporations		39,868	42,620	40,811
Pension funds		47,727	53,461	67,722
Other insurance corporations		21,829	29,015	26,183
Central borrowing authorities		9,443	9,395	9,567
Financial intermediaries n.e.c.		26,514	21,756	22,418
National general government		15	22	16
State and local general government		315	575	705
Households		6,704	5,461	6,915
Rest of world		243,867	272,303	350,148
Total		493,691	533,912	617,356

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 Commonwealth 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 which 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 past three years.

26.20 VALUE OF AUSTRALIAN DOLLAR, Against major currencies - At last trading day in June
	2002	2003	2004

United States of America dollar	0.5670	0.6700	0.6936
United Kingdom pound	0.3720	0.4047	0.3851
Japanese yen	68.09	80.44	75.46
Euro	0.5790	0.5907	0.5787


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)
		2001-02	2002-03	2003-04
		$m	$m	$m

Transactions by foreign exchange dealers(b)
	Outright spot(c)	22,772	30,384	39,440
	Outright forward(d)	6,407	7,424	7,675
	Swaps	58,404	68,014	78,190
	Options	4,832	6,298	7,233
	Total	92,414	112,120	132,538

(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.