LGFA Financial Market Conditions
Global financial markets saw some volatility over the past month due to political instability in Italy and renewed concerns about the state of the European Union.
Recent Italian elections did not produce a clear winner with a complex structure of coalitions and alliances finally forming a government led by a former law professor and populist, Giuseppe Conte. During negotiations, Italian bond yields spiked around 1% when an anti-euro campaigner was nominated as the finance minister, however, retreated when his nomination was withdrawn. The moves in Italian Bonds saw a flight to quality with the yields on US Treasury and other high-quality bonds falling as a result. Market participants fear that the anti-establishment and right-wing mix of the new Italian government has renewed debate about the long-term prospects of the European Union and the single currency.
Australian financial markets also experienced some volatility in May. Australian bond yields fell over the past month partially on the back of Italian and Euro concerns but also due to weaker internal dynamics. The Bank Royal Commission currently being held in Melbourne has highlighted some of the poor lending practises by banks with many in the market speculating that the bank regulator APRA, will introduce stronger serviceability requirements, which could have negative implications for housing prices and economic growth. In mid-May Australia’s unemployment rate increased to 5.6% (from 5.5%) even though employment grew by 22,600.
The Reserve Bank (RBA) met in early May and left the official cash rate unchanged at 1.5%. In the statement accompanying the decision, the RBA reiterated that strengths in the economy highlighted by strong business conditions and strong employment growth were being tempered by low inflation and low wage growth. In mid-May, highly regarded Australian economist Bill Evans, altered his interest rate forecasts by removing a rate hike originally scheduled for early next year and also adding that rates would be on hold for the 2019 calendar year. He altered his forecast due to recent decreases in housing prices having a negative wealth effect on Australian households and reduced likelihood of higher wage growth due to a deteriorating/stagnating employment market. Interest rate futures market pricing currently doesn’t have a rate hike factored in this year.
Implied RBA Cash rate as at 31/05/2018: