The US economic data continues to impress, with the key employment figures showing healthily jobs
growth for the month of November. This saw US equity markets rise significantly on Friday, with the market up over 2%. believes this bodes well for the global economy and expect to see equity markets continue to push higher into the end of the year. It also confirms our view that the US Federal Reserve will lift interest rates later this month by 0.25%.
- US equity markets up over 2% on strong employment growth
- European markets continue to lag after ECB
president Mario Draghi disappointed with his
bond buying program - The ASX and NZD both had bad days on Friday,
ending down 1.5% and 0.5% respectively.
Market
US (S&P 500)
UK (FTSE 100)
Europe (STOXX 50)
Australia (ASX)
NZ (NZX 50)
Daily % Change
2.0%
-0.6%
-0.4%
-1.5%
-0.5%
Year to Date %
1.6%
-5.0%
6.2%
-4.8%
9.5%
Equity Markets
Currencies
AUDUSD 0.1%
-10.1%
NZDUSD
1.0%
-13.6%
At The Minute insights
Huston we have Lift-off
The US Federal Reserve is now free to increase interest rates by 0.25% in December in our opinion. The US
economy added 211,000 jobs in November which continues a string of robust economic numbers. It will be the first time in 8 years that interest rates have been increased in the US and signifies an important change for the global economy. We have managed to transition away from the global financial crisis which almost took down the entire global banking system, into a new stage of development.
The path higher for interest rates is likely to be very slow. The US Federal Reserve will not want to spook
markets by moving too quickly. Rather they will want to wait and assess the outcome of any changes before deciding what to do next.
Australian and New Zealand Mortgage rates
This means that market interest rates here in Australia and New Zealand are likely to also go a little higher
given the change in the US, but not materially and the process is likely to be very slow. However, both the
Reserve Bank of Australia and New Zealand are currently trying to stimulate their economies and therefore have been reducing their cash rates. Therefore, it is unlikely in our opinion that bank mortgage rates would suddenly increase materially.
AUD & NZD
The AUD and NZD currencies are likely to follow their downward trajectory when the US Federal Reserve
does increase interest rates. This is due to the interest rate differential and the fact that interest rates in
the US are now relatively higher than before. This means people demand USD’s as opposed to AUD’s and
NZD’s.
Equity Markets
Stock markets appear to be very comfortable with interest rates finally increasing. Friday’s equity market
reaction demonstrated this. The strong economic number is a reflection that the US economy is doing
rategy Group
reasonably well and markets reacted positively to the good news. Previously there was a concern that an
interest rate hike could spark a collapse in equity markets, but this no long appears to be the consensus
view.
believes that December is likely to be a good month for equity markets. There has been a trend over
the past 5 years for equity markets to perform very well into the new year. We believe our Australian and
New Zealand portfolios are well positioned to capture these moves.
Chart of the Moment – A Merry Christmas for retailers?
“Spending Spree” is a key thematic in the
portfolio. Myer is one retailer holds. Since
adding it to our portfolio at the start of October,
it is up over 30%.
Australian retail sales numbers on Friday were
better than expected with a strong growth in
department store sales leading the way.
It appears that the interest rate cuts from the
Reserve Bank are finally starting to take effect on
the wider economy. This bodes well for the retail
space which should benefit from consumers
h aving more discretionary income from lower
interest rates. Christmas is a key time for
retailers, and initial indications point to a merry
Christmas for retailers this year.
Five Things Markets Will be Watching this Week
1. Whether global markets can follow the US moves on Friday and reverse the sharp sell-off experienced by markets at the end of last week.
2. The Reserve Bank of NZ will make a monetary policy decision on Thursday. While we believe there is likely to be no change to the official cash rate (OCR) this month, and hints of the timing of further rate cuts in 2016 will be looked for.
3. European GDP numbers will be released on Tuesday, and the health of the European economies will be a key factor in determining whether the European Central bank needs to provide further stimulus.
4. The performance of the US dollar this week will be in focus, as to whether it gains strength on the back of a higher likelihood of a hike by the US Fed, in our view.
5. China export and import data is due to be released on Tuesday, and will be watched closely as investors assess the level of slowdown being experienced in China.
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