Global share markets mostly rose over the last week helped by indications from the Fed that it’s still in no hurry to raise interest rates, expectations that the ECB might have to provide more stimulus, the Scottish No vote removing risks over UK assets and the continuing slide in the Yen to a six year low providing a boost to Japanese shares. US shares rose 1.3%, Eurozone shares gained 0.9% and Japanese shares rose 2.6%. Chinese shares fell on soft data but only by 0.1% thanks to signs of monetary easing. The combination of poor Chinese economic data and the falling $A weighed heavily on the Australian share market which lost 1.8% as foreign investors tend to retreat to the sidelines whenever the $A is under threat. Bond yields were mixed but the $US continued its ascent which in turn saw the Australian dollar remain under pressure, falling below $US0.90.
The US Federal Reserve provided no surprises with another $US10bn taper to its QE program leaving it on track to end next month and an ongoing assessment that considerable labour market slack remains and that a “considerable time” is likely to elapse between the end of QE and the first rate hike. However, the Fed is incrementally continuing to become less dovish with Fed officials’ “dot plot” of interest rate expectations getting revised up slightly and Janet Yellen highlighting that the timing of the first rate hike is dependent on how the economy performs. Our assessment remains that the Fed can afford to take it’s time for now, but in the June quarter next year it will start to gradually raise rates. The anticipation and then the reality of this could cause bouts of share market volatility – particularly whenever there is a run of strong US economic data, but it’s unlikely to derail the bull market as rate hikes will be reflecting strong economic and profit conditions. Only when interest rates reach onerous levels will there be a significant problem, but that will be a fair way off.
Please click here for the full article: Weekly Report ~ 19 September 2014