Financial Market Conditions

Global financial markets were relatively stable over the past month after the UK negotiated an extension to their Brexit deadline and markets became complacent about a US-China trade deal.

The US-China trade deal was not resolved in April as both sides continue to argue about what extra commodities the Chinese would buy and how US intellectual property rights would be protected. Many now see that the negotiations will become long and protracted as both countries don’t want a third party overseeing the agreement.

The US Federal Reserve met late in the month and left their benchmark rate unchanged targeting a rate between 2.25-2.5%. In their accompanying statement, they cited that although the overall economy was performing well, lack of inflationary pressure was more of a concern.

Early in the month UK Prime Minister, Teresa May, negotiated an extension to the Brexit deadline now set for 31 October this year. While the extension is a nice reprieve for the UK and financial markets alike, a deal with Europe is still to be finalised. Many commentators feel that UK’s fragmented parliament will be attempting to work through the same issue again in October.

Australian financial markets experienced higher volatility, than other markets, over the past month. Late in the month Australian inflation data surprised markets when the March headline number printed flat, taking the year on year figure down to 1.3%, well below the RBA’s target range of between 2-3%. This low inflation print filtered through markets and increased the probability of near-term rate cuts by the RBA. The Australian dollar took a bit of a hit after the release of the weak CPI data, however, rebounded after the Reserve Bank left the cash rate on hold and is now trading at around $0.70 USD.

cpi graph

The RBA met in early May and left the official cash rate unchanged at 1.5%. The statement accompanying the decision stated that the global economy remains in a reasonable condition and that global financial conditions remain accommodating. In terms of Australian economic conditions, they noted the recent significant increase in employment, the continuing adjustment in established housing markets and that recent inflation data was noticeably lower. The board also noted that they would be paying close attention to developments in the labour market at its upcoming meetings. Current interest rate futures pricing has a full 0.25% rate factored in by early July and another 0.25% rate cut fully factored in by January 2020.

Implied RBA Cash rate as at 30/04/2019:

cash rate graph