Market Commentary

by Chris Limberg on Sep 15, 2014

The Australian Sharemarket performance has been negative this quarter with the S&P ASX200 closing at 5,292, down approximately 2% however, the gross amount is a fall of about 6.5% in the month of September.

Australia

  • The Reserve Bank of Australia (RBA) kept the cash rate at 2.50% pa for the quarter stating  “the most prudent course was likely to be a period of stability in interest rates”
    • RBA Board Members noted over the quarter the continued growth of house prices in larger cities and this trend should be closely monitored
  • The labour market remains soft with previous moderate job increases failing to eventuate with unemployment increasing. Wages growth remained low which is consistent with increasing unemployment
  • The Australian dollar continues above estimated worth. Resulting in less than usual assistance in achieving balanced growth across the Australian economy.
  • The inflation rate again rose slightly during the quarter to 3.0% pa, on the edge of the RBA target range of 2 to 3% but is expected to moderate in the future.

US

  • The US S&P 500 and Dow Jones Industrial Average finished the period weaker after a volatile period
  • The US economy continues to improve month by month
  • The FED completed the quantitative easing (money printing) stimulus program and the minutes now discuss when, what triggers and the process for increasing the interest rate. Increasing rates gradually beginning in 2015 and stabilising in 2017 around long term average levels seems the most likely course of action. The Fed is likely to be conservative in its rate increase approach to foster and preserve current growth.

Europe

  • Indicative of the European situation the strongest economy, the German economy, has slipped into recession with a sharp contraction in exports and falling goods orders likely to exacerbate the contraction
  • EU Bank Chairman Mario Draghi is attempting to stave off a deflationary economic environment. While quantitative easing is not part of his economic tool box, mainly due to German distain for the practice, it may yet become a reality
  • Mario Draghi has questioned the commitment of European Governments in pursuing needed reforms with long term structural economic hurdles persisting including high unemployment and Government debt levels. It would seem European Governments have squandered this crisis in failing to implement much need reforms.
  • The Ukraine/Russian dispute continues   

China & Japan

  • Chinese economy continues to grow at a reported rate of 7-7.5%pa
  • The implications of the November 3rd plenary session of the 18th Party Congress continue to impact the Chinese economy which focused on
    • Lowering house prices
      • Strict controls have reigned in house prices which now seem to have settled at a lower level
  • Japan, Australia’s largest trading partner, has hiked the consumption tax rate dramatically from previous levels. This has seen a sharp contraction in Japanese consumption and the flow on negative impact on Australia exports is beginning to impact the Australian economy

Market Themes for 2015

For financial year 2015 we are looking for catalysts to drive markets to higher levels:

  • Increasing business confidence and profits
  • Increasing RBA support for Australian market transition away from mining
  • Strengthening US growth proving stimulating actions are no longer required
  • A stronger US dollar
  • Stabilisation in the Chinese economy
  • Liquidity support from both Japan and the Europe

Also destabilising events that may impact sharemarkets such as:

  • Lower US growth and emerging inflation
  • RBA intransigence on rates
  • A resilient Australian dollar
  • Intensifying political turmoil
  • World political elections
  • Geopolitical terrorist activity in the Middle East and Ukraine

Should you have any queries or want to discuss the above or your portfolios please do not hesitate to contact us.