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1301.0 - Year Book Australia, 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.


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