The S&P ASX200 has fallen 8.8% since the beginning of the quarter. September quarter was incredibly volatile with the S&P ASX200 falling 800 points or 14% from its high in early August. Market volatility can only be described as extreme with daily movements of 1% or more the norm rather than the exception. The major financial issues impacting the Australian market have been the continuing decline of commodity prices and Chinese Growth rates. We believe these trends will remain for the foreseeable future and a degree of caution is warranted with current market volatility.

Australia

• The Reserve Bank of Australia (RBA) kept the cash rate at 2% p.a. stating “policy remained appropriate to foster sustainable growth and inflation consistent with the target”
• The labour market long term gradual rise in unemployment appears to have stagnated around 6.25% however, low wage growth persists and individual work hours continue to increase which will impact consumer confidence and spending in the coming months
• Lowering the interest rate has proved a boon to Sydney and Melbourne housing markets however, house prices have struggled in other major cities
  • The RBA noted the divergence in Sydney and Melbourne house and unit prices. With house prices growing and unit prices increasing but at a slower rate
• The Australian dollar continued its decline closing at $0.776 USDs but has performed better when compared against other major currencies. Given the continued fall in commodity prices the Australian dollar is likely to persist in weakening against most currencies
• The inflation rate has fallen further below the RBA target range of 2-3% pa currently 1.3% pa compared with 1.7% pa in the March quarter, giving room for further interest rate cuts until such time as wage growth re-emerges to drive inflation
• The RBA having cut the interest rates twice already this year remains receptive to further rate cuts but is expected to wait to assess the impact of previous rate cuts on the economy before adjusting rates again

US

• The US S&P 500 and Dow Jones Industrial Average had another relatively flat period primarily on concerns of when the FED (Federal Reserve System – The US Central Bank) would begin to lift interest rates
• The US economy continues to strengthen
• FED Chair Janet Yellen remains dovish or biased towards waiting for clear evidence that a rate raise is needed to cool the US Economy. Most commentators have predicted a rate rise at some point this year with many predicting an increase in September
• US presidential election campaigns have begun for the November 8, 2016 Election

Europe

• European economy continues to struggle
• Greece has once again failed to pay its debts, under the recently devised bailout program. The Syriza Government conducted a referendum on whether to accept terms from European agencies and the International Monetary Fund. A strong no vote was achieved with 61% of Greeks rejecting increased austerity measures. European decision makers are now caught between softening the bailout deal, thereby displacing the risk of taking on debt, or expelling Greece from the Euro currency
  • Greece has since agreed terms with the European Union and their banks have reopened
    • However the underlying issues have not been resolved and much like last time policy makers have bought some time to fix its issues until Greece and its debt make world headlines again
• The Ukraine/Russian dispute continues. However, the dispute has not been making headlines with Europe largely focusing on Greece

China

• Growth of the Chinese economy continues to slow
• Fears of a Chinese property bubble have been eclipsed in recent times by the Chinese Financial Market
  • The Chinese share market over the last 12 months has had no fundamental justification with some companies valued on a share price to earnings ratio (P/E) of over 150 times. Meaning for every 1 cent the company earns the price is $1.50 making a sharemarket crash inevitable. For comparison a P/E over 25 is considered expensive
  • The Chinese Government is attempting to manage the bursting bubble through rapidly changing regulation
  • Unfortunately this is another case of the mum and dad investors buying in at exactly the wrong time
• The likely outcome is a return to pre-bubble share prices with unsophisticated investors losing out and a raft of new regulations placed on the Chinese Sharemarket
• Fortunately the amount of money invested in the Chinese Sharemarket is relatively small compared to China’s overall GDP (Gross Domestic Product) which should limit the impact on the wider Chinese economy