Global Markets
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Rising global bond yields and jitters ahead of the impending US Presidential election were the main global themes last week. US Q3 GDP was slightly better than expected (2.9% vs. market 2.5%) affirming a likely Fed rate hike in December (market has a 75% chance). The latest twist in the Clinton/FBI/email saga also sparked fears Trump could yet stage an upset! A good UK Q3 GDP outcome (0.5%) was also greeted with relief in London, and reduced the chances of the Bank of England (BOE) announcing a rate cut at this week’s meeting, which is Pound bullish in at least the short-term. The US dollar consolidated recent gains, the S&P 500 eased back a little further and US 10-year yields reached a 5-month high of 1.85%.
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Key global events this week are the US Fed meeting, US payrolls and meetings by the BOE and BOJ. No Fed move is expected given the US election next week, but interest will be in the degree to which the Fed’s Statement affirms the now strong market view of a rate hike next month. US payrolls are expected to be rate-hike supportive, with an employment gain of 175K. No moves by either BOE and BOJ are expected, which adds to the theme that central banks are holding back on further stimulus (hence the rise in bond yields!)
Australian Markets
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Closer to home, last week’s CPI result was only in line with expectations, with underlying annual CPI inflation holding at around 1.5%. This gives the RBA little reason to cut rates this week, though a rate cut is still possible in H1’17 if further CPI reports suggest underlying inflation is unlikely to reach the RBA’s 2% June qtr 2017 forecast. Rising global bond yields and RBA disappointment saw the local equity market underperform badly, losing 2.7%. Resource stocks generally held up, with iron ore prices (odd but impressively) strengthening further.
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Key local events this week are the RBA Melbourne Cup day meeting, and Friday’s RBA Statement on Monetary Policy. No move and a fairly neutral RBA Statement is my expectation, which should be affirmed by no change to the RBA’s inflation forecasts in Friday’s SMP. The RBA will only cut rates again if and when it feels the need to lower its inflation forecasts further (which is unlikely before the February or even May 2017 meetings). Key local data are building approvals (Wed.), trade balance (Thurs.) and retail sales (Fri). Approvals should ease back further in Sept, confirming the peak of the home building boom is past, while retail sales should post a more muted 0.2% gain after August’s healthy 0.4% gain. In further good news, the trade balance will narrow further, supported by the recent gains in coal and iron ore prices.
The Wrap
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Equity markets are understandably nervous at present, with global central banks less supportive than they used to be, rising bond yields and Trump not yet out for the count. US earnings season is also proving mixed, and not sufficiently positive to drag Wall Street higher. That said, markets have yet to endure a major sell-off, with the pull back in recent weeks fairly gradual.
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Australia stock have underperformed of late, despite the rally in resource stocks and commodity prices, as investors ditch their once-loved yield stocks in the facing of rising bond yields.
Have a great week!
Originally published by BetaShares