Financial Market Conditions

Global financial markets were relatively stable over the past month as emerging market contagion fears subsided.

Fears of a broader emerging markets economic crisis dissipated over the past month after Turkey lifted its benchmark interest rate by 6.25% to 24%. While this move stabilised its currency the long-term prospects for the Turkish economy are not clear.

During the month the US President announced a new 10% tariff on $200 Billion of Chinese goods. Many now feel that the trade dispute is not just about bringing US jobs back to America but is also about technology theft and intellectual property rights violations by China. Late in the month the US Federal Reserve raised the reserve rate for the third time this year, by 0.25%, now targeting a range of between 2-2.25%. US equity markets reacted favourably to this period of stability with the Dow Jones Industrial Index hitting new all-time highs. US 10 Year bond yields rose 0.2% over the past month and are currently trading above 3% for the first time since May.

Australian financial markets were also relatively stable over the past month.  In early September, Australian Gross Domestic Product (GDP) data impressed with the Australian Economy growing by 0.9% over the first quarter taking the year on year figure up to 3.4%, well ahead of market consensus of 2.8%.

Aust GDP Sept

Mid-month employment data revealed that the Australian economy added 44,000 jobs in August, well above forecasts of an 18,000 gain. Despite this the unemployment rate remained static at 5.3% as overall participation levels edged higher. Preliminary findings of the bank royal commission have highlighted some dubious practices in the financial sector. Banks have already begun tightening lending standards in response to public pressure and these findings with many predicting this will place further pressure on Sydney and Melbourne’s house prices. The Australian dollar fell 0.04 USD over the past month and is currently trading at around $0.70 USD.

The Reserve Bank (RBA) met in early October and left the official cash rate unchanged at 1.5%. The statement that accompanied the decision still paints a mostly positive view of economies around the globe as they are experiencing strong levels of economic growth during a period of low inflation, interest rates and unemployment. The Governor also highlighted that the Australian labour market remains positive and housing prices in Sydney and Melbourne have continued to ease. 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 30/09/2018:

cash rate sept