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1301.0 - Year Book Australia, 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.


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