Financial Market Conditions

Global financial markets experienced some volatility over the past month as equity markets around the globe continued to grapple with the prospects of higher interest rates.

Mixed economic data out of the US, stalled Brexit negotiations and Italian budgetary issues caused volatility in global equity market during October. Early in the month US 10-year treasury yields climbed 0.12% to 3.18%, their highest level since July 2011 on the back of very strong US manufacturing data. This pushed up the probability of near-term rate hike by the Federal Reserve which then caused equity markets to sell off on the prospect of these higher rates and so much so that by the end of the month the US S&P 500 equity index had erased all the gains made year to date.

dow jones graph

Brexit negotiations stalled over the past month which was mainly caused by issues around the free movement of goods over the Northern Ireland border. During the month credit rating agencies warmed the UK that if a deal is not sort by the March 2019 it could cause downgrade making their borrowing costs more expensive.

Some poor economic data and Italian budgetary issues weighed on the Eurozone and its singular currency over the past month. Plans by the recently elected Italian government to boost economic growth by increasing fiscal spending were essentially rejected by the European commissioner as the result would further deteriorate their budget position. This news saw Italian 10 years bonds rise over 3% to their highest level in over 5 years. Late in the month Eurozone growth printed at 0.2% for the June to September quarter taking the year on year figure to 1.7%, its lowest level in over 4 years.

eurozone graph

Australian equity markets also experienced some volatility over the past month. While Australian stocks followed the global trend lower, our equity market has also been suffering due the more home-grown issues of bad sentiment towards Australia’s major banks resulting from findings of the Bank Royal Commission and declining house prices in Melbourne and Sydney. Australia’s major banks stock values have declined between 8-14% over the past year and have dragged the whole market down due to their huge weighting. The Australian dollar rallied around $0.02 USD over the past month and is currently trading at around $0.73 USD.

The Reserve Bank (RBA) met in early November and left the official cash rate unchanged at 1.5%. The statement that accompanied the decision paints a positive view of economies around the globe as many are experiencing strong levels of economic growth during a period of low inflation, interest rates and unemployment. The Governor also highlighted Australia’s recent strong gross domestic product data and our positive labour market. Current interest rate futures market pricing predicts that the cash rate will be on-hold for at least the next twelve months.

Implied RBA Cash rate as at 31/10/2018:

rba graph