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 27.12, 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. Table 27.13 shows details of household demand for credit.

27.12 DEMAND FOR CREDIT(a)
		Net transactions during year
		2004-05	2005-06	2006-07
		$m	$m	$m
Funds (including equity) raised on conventional credit markets by:
	Private non-financial corporations(b)	-15 064	125 901	156 554
	National public non-financial corporations	602	658	16 489
	State and local public non-financial corporations	5 261	3 868	4 396
	National general government	-2 395	1 341	-1 821
	State and local general government	-447	-1 821	353
	Households	103 818	113 168	126 188
	Total	91 775	243 115	302 159
(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).

Table 27.13 shows the components of household borrowings.

27.13 HOUSEHOLD DEMAND FOR CREDIT
				Net transactions during year
				2004-05	2005-06	2006-07
				$m	$m	$m
Households demand for credit				103 818	113 168	126 188
	Housing			83 830	92 163	91 165
		Total Authorised Deposit-taking Institutions (ADIs)		55 136	59 225	54 912
			Owner-occupied housing	37 722	42 386	38 152
			Investment housing	17 414	16 839	16 760
		Other lenders		28 694	32 938	36 253
	Non-housing borrowing			19 988	21 005	35 023
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 27.14 summarises the performance of the major indexes.

27.14 AUSTRALIAN STOCK MARKET INDEXES(a)
		2004-05	2005-06	2006-07
All ordinaries
	Index(b)	4 229.9	5 034.0	6 310.6
	High(c)	4 275.6	5 352.1	6 421.0
	Low(c)	3 479.3	4 179.8	4 881.3
S&P/ASX 200		4 277.5	5 073.9	6 274.9
	Banks	10 865.0	12 722.2	14 771.1
	Industrials	6 824.7	7 618.2	9 424.4
	Resources	2 861.1	4 282.8	5 295.3
(a) Base 31 December 1979 = 500.
(b) Share prices on joint trading floors; June closing value.
(c) Over a 12-month period ending 30 June.
Source: Australian Stock Exchange; Reserve Bank of Australia; Standard and Poor's.

Table 27.15 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.

27.15 EQUITY MARKET(a) - 30 June
	2005		2006		2007
	Listed	Unlisted	Listed	Unlisted	Listed	Unlisted
	$m	$m	$m	$m	$m	$m
AMOUNTS ON ISSUE
Total equities and units in trusts	982 645	828 969	1 216 029	993 859	1 605 688	1 123 081
ISSUED BY
Private non-financial corporations	588 202	192 807	772 235	226 405	1 078 723	254 610
National public non-financial corporations(b)	62 963	5 629	45 792	5 781	-	6 918
State and local non-financial corporations(b)	-	89 270	-	84 620	-	80 329
Central bank(b)	-	11 241	-	12 685	-	9 703
Banks	216 970	6 496	254 508	6 901	308 631	7 338
Other depository corporations	415	32 784	634	35 037	1 108	37 583
Life insurance corporations	19 698	4 242	28 041	4 539	32 565	4 945
Other insurance corporations	28 279	31 503	32 290	28 262	37 785	38 941
Central borrowing authorities	-	30	-	30	-	30
Financial intermediaries	66 118	105 265	82 529	134 545	146 876	149 279
Rest of world	-	349 702	-	455 054	-	533 405
HELD BY
Private non-financial corporations	18 932	146 937	28 112	196 451	np	221 338
National public non-financial corporations	-	4 021	-	3 736	-	316
State and local public non-financial corporations	-	280	-	291	-	378
Banks	2 029	99 858	1 572	115 177	1 272	135 790
Other depository corporations	67	4 443	50	4 033	85	3 533
Life insurance corporations	64 960	61 624	72 745	65 757	85 242	74 952
Pension funds	197 980	163 546	253 678	209 194	342 682	257 431
Other insurance corporations	7 743	28 674	10 558	32 246	13 411	34 686
Financial intermediaries	77 633	54 157	126 042	76 677	np	np
National general government	32 618	17 512	23 723	19 221	np	np
State and local general government	-	93 195	-	89 868	-	87 588
Households	236 375	73 943	295 294	78 618	372 198	80 206
Rest of world	344 307	80 779	404 255	102 590	511 834	119 933
- nil or rounded to zero (including null cells)
np not available for publication but included in totals where applicable, unless otherwise indicated
(a) Includes units in trusts.
(b) 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 30 June are shown in table 27.16.

27.16 SHORT-TERM MONEY MARKET RATES(a) - 30 June
	2005	2006	2007
	%	%	%
11:00 am call	5.50	5.75	6.25
Bank-accepted bills - 90 days	5.66	5.96	6.42
(a) Per annum.
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 27.17 shows the amount on issue by sector of issuer and sector of holder of the various types of money market securities.

27.17 SHORT-TERM DEBT SECURITIES
	Amounts outstanding at 30 June
	2005	2006	2007
	$m	$m	$m
ISSUED BY
Private non-financial corporations	81 472	93 548	104 873
National public non-financial corporations	509	1 546	18
State and local public non-financial corporations	16	33	38
Banks	155 147	197 212	230 252
Other depository corporations	30 288	29 678	26 212
Life insurance corporations	3	6	9
Other insurance corporations	416	452	438
Central borrowing authorities	5 995	5 374	6 194
Financial intermediaries n.e.c.	24 332	27 914	37 889
National general government	270	252	252
State and local general governemnt	642	762	855
Households	15 223	17 618	22 088
Rest of world	2 236	3 598	4 319
Total	316 549	377 993	433 437
HELD BY
Private non-financial corporations	27 900	25 494	27 369
National public non-financial corporations	215	240	349
State and local public non-financial corporations	1	-	-
Central bank	4 718	13 902	14 473
Banks	60 905	74 319	89 284
Other depository corporations	37 648	30 824	43 621
Life insurance corporations	18 133	17 132	18 222
Pension funds	27 244	28 486	35 533
Other insurance corporations	9 661	10 281	11 281
Central borrowing authorities	20 843	16 239	22 594
Financial intermediaries n.e.c.	22 908	22 556	25 090
Households	7 417	7 122	7 138
Rest of world	78 956	131 398	138 483
Total	316 549	377 993	433 437
- nil or rounded to zero (including null cells)
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 27.18 shows selected market yields at the end of June for a range of bonds.

27.18 BOND MARKET, Market yields(a) - 30 June
		2005	2006	2007
		%	%	%
Treasury bonds
	3 years	5.10	5.78	6.45
	5 years	5.10	5.78	6.40
	10 years	5.11	5.79	6.26
New South Wales T-corp bonds
	3 years	5.33	6.01	6.72
	5 years	5.36	6.02	6.76
	10 years	5.39	6.08	6.66
Finance company debentures
	3 years	5.40	5.90	6.40
(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. Details of the amounts outstanding on bonds issued and held are shown in table 27.19.

27.19 BONDS
		Amounts outstanding at 30 June
		2005	2006	2007
		$m	$m	$m
ISSUED BY
Private non-financial corporations
	Issued in Australia	38 784	45 475	56 870
	Issued offshore	42 471	47 801	50 044
National public non-financial corporations
	Issued in Australia	3 976	3 360	630
	Issued offshore	9 658	9 481	-
State and local public non-financial corporations
	Issued in Australia	82	82	2
	Issued offshore	-	-	-
Banks
	Issued in Australia	49 425	63 174	73 506
	Issued offshore	146 674	179 283	204 103
Other depository corporations
	Issued in Australia	9 861	10 645	11 769
	Issued offshore	23 449	20 469	14 353
Life insurance corporation
	Issued in Australia	-	-	-
	Issued offshore	1 258	1 186	1 484
Other Insurance corporation
	Issued in Australia	340	290	461
	Issued offshore	3 029	2 981	2 380
Central borrowing authorities
	Issued in Australia	60 072	58 059	60 871
	Issued offshore	25 409	27 822	30 305
Financial intermediaries n.e.c.
	Issued in Australia	79 326	98 941	124 991
	Issued offshore	63 068	67 388	89 230
National general government
	Issued in Australia	57 913	57 598	55 356
	Issued offshore	1 074	878	883
State and local general government
	Issued in Australia	285	235	230
	Issued offshore	-	-	-
Rest of the world
	Issued in Australia	40 062	64 418	76 084
	Issued offshore	63 082	82 592	91 646
Total		719 298	842 158	945 198
HELD BY
Private non-financial corporations		7 900	9 910	17 299
National public non-financial corporations		20	15	15
State and local public non-financial corporations		86	42	42
Central bank		35 248	45 214	42 647
Banks		50 698	50 222	54 769
Other depository corporations		19 839	21 048	24 329
Life insurance corporations		44 157	48 506	49 876
Pension funds		59 861	78 690	86 930
Other insurance corporations		31 302	33 940	33 670
Central borrowing authorities		9 918	9 545	11 637
Financial intermediaries n.e.c.		48 022	54 756	63 356
National general government
	State and local general government	704	2 513	1 513
	Households	7 277	8 109	6 942
	Rest of world	404 266	479 648	552 173
Total		719 298	842 158	945 198
- nil or rounded to zero (including null cells)
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 27.20 shows the value of the Australian dollar against major currencies.

27.20 VALUE OF AUSTRALIAN DOLLAR, Against major currencies
	At last trading day in June
	2005	2006	2007
United States of America dollar	0.7659	0.7440	0.8521
United Kingdom pound	0.4254	0.4099	0.4282
Japanese yen	85.0400	86.0800	105.4900
Euro	0.6379	0.5925	0.6376
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 27.21 shows daily averages of foreign exchange turnover against all currencies. More recent information may be found in the Reserve Bank of Australia Bulletin table F.10 (<http://www.rba.gov.au/Statistics/Bulletin/index.html>).

27.21 FOREIGN EXCHANGE TURNOVER AGAINST ALL CURRENCIES
		2004-05	2005-06
		$m	$m
Transactions by foreign exchange dealers(a)
	Outright spot(b)	38 746	53 693
	Outright forward(c)	7 944	11 881
	Swaps	87 514	108 089
	Options	3 209	3 236
	Total	137 413	176 898
(a) Australian banks and non-bank financial intermediaries authorised to deal in foreign exchange.
(b) An outright spot transaction is one for receipt or delivery within two business days.
(c) An outright forward transaction is one for receipt or delivery in more than two business days.
Source: Reserve Bank of Australia.

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