Has the $US bottomed?

BY David Bassanese | 26 September 2017
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Global Markets Review & Outlook

It was a mixed week on global markets with the highlight being a more “hawkish” than expected Fed meeting. In particular, the Fed affirmed it would begin balance sheet run-down next month as expected, but surprised markets by also affirming its expectation of raising rates again in December – and three times in 2018 – despite a recent run of lower than expected inflation results.

Although Fed chair Janet Yellen appears more open minded about the possibility that low (sub-2%) inflation could be more than transitory (now describing it as a “mystery”), the Fed is taking heart from the ongoing apparent tightness of the labour market, which it feels will eventually lead to higher wage and price gains. We’ll see!

The Fed’s action led markets to push up US 10-yr bond yields and the $US modestly, and there are now tentatively important bottoms in place for both – suggesting their year-long slide could be at an end. Global stocks, meanwhile, shrugged off the Fed’s actions, with the global banking sector performing particularly strongly.

Markets also largely shrugged off further tensions in North Korea, despite new US sanctions and a new “war of words” between Trump and Kim Jong-un.

In other news, S&P downgraded China’s sovereign credit rating one notch to A+ – the first downgrade since 1999 – citing ever rising corporate debt levels. This followed a similar move by Moody’s in May. Although the move was derided by Chinese officials, it will likely add pressure for a tightening in credit and further corporate deleveraging once the all-important 5-yearly leadership reshuffle is completed in October – which in turn would be more bearish news for iron-ore prices and the $A.

There is a smattering of US economic data news week (such as durable goods, home sales and consumer confidence) but nothing that could jar market sentiment as much as the all-important monthly payrolls report. That may see markets re-focus on North Korean tensions and/or further agonise over the interest rate outlook, with another key policy speech from Yellen on Tuesday.

Australian Market Review & Outlook

The Australian equity market limped through another week, shedding 0.2% in value, to remain in a very narrow range around 5700.

That sector, sector performance was quite mixed. A second weekly drop in iron ore prices (with the June to August rally now seemingly over) hurt resource stocks, and rising global interest rates hurt yield sectors like listed property. That said, financials (ex A-REITs) did post a second week of gains – helped by a stronger global banking sector – and affirming the view that rising bond yields are less of a negative for local financials despite their also attractive yield.

The only key local news last week was the RBA policy minutes and a speech by Governor Lowe – which both expressed guarded confidence in the economic outlook yet also suggested a lift in rates still remained some way off. There is only second-tier data in Australia next week, suggesting we’ll mainly look to global markets for direction.

Have a great week!

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