Financial Market Conditions

Over the past month the ongoing trade dispute between US and China coupled with the prospect of a hard Brexit resulted in a high level of volatility in financial markets.

The ongoing trade dispute between the US and China did not get any closer to resolution over the past month. While Presidents’ Trump and Xi have made some steps to open up dialog in late November, they are still yet to make an agreement regarding intellectual property rights for US industries producing goods in China. Mid-December the US Federal Reserve increased their reserve rate by 0.25% and are now targeting a range between 2.25%-2.5%. In their accompanying statement the Fed still spoke about the need for gradual rate increases, but reduced their forecast from 3 to 2 hikes in 2019.

In mid-December the UK failed to legislate the Brexit deal agreed between UK and European Union negotiated in November. This failure has opened up the possibility of an exit from union with no concession in place or the prospect of a fresh referendum on issue.

Uncertainties created by the US-China trade war and Brexit have created a high level of volatility in financial markets around the globe. Global equites experienced large losses over the past month with the US S&P 500 index falling 9.2%, the German DAX index falling 6.2% and Japanese NIKKEI index falling 10.5%.

us index

Global bond yields also fell over this time period, highlighted by the US 10-year bond yield falling 0.31% to 2.62% with other high-quality sovereign bonds experiencing a similar fate.

Australian financial markets also experienced volatility over the past month. Economic data released over the past month was mixed. Despite 37,000 new jobs being added in November unemployment rose by 0.1% in November to 5.1% due to a seasonal adjustment. CoreLogic data released early in the new year showed that Australian housing prices fell by -4.8% in 2018. Australian 10-year bond yields fell 0.27% to 2.32% in December and in early January are trading at even lower levels. The Australian dollar was hit hard by the recent market volatility and dropped around $0.03 USD to $0.70 USD during December.

The Reserve Bank (RBA) met in early December and left the official cash rate unchanged at 1.5%. The statement noted that global economic conditions remain positive. The board also noted that housing prices in Sydney and Melbourne have continued to ease. However, dwelling investment remained strong in the last quarter. The board also considered the recent market volatility and the flow on effects to the Australian economy and once again decided that the current stance on monetary policy continues to be appropriate and that the next move in rates is more likely to be an increase than a decrease. Due to the high levels of volatility since the release of the RBA’s statement in early December, the market no longer reflects the same view.

Implied RBA Cash rate as at 31/12/2018:

rba cash rate

Business Conditions

NAB’s Australian business conditions survey for November continued its downward trend seen over recent months falling from +13 to +11. While business conditions remained well above the long-term average, business confidence fell from +5 to +3 which is now below the long-term average.