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October 2018 Market Wrap

It was a poor month for the Australian share market with the All Ordinaries index falling 6.5% (after falling 1.6% in September) to close at 5,913.3 points. The Australian Dollar also fell by 2.1%, with 1 Australian dollar currently buying 70.82 US cents.

Once again, the Reserve Bank of Australia (RBA) board kept the official Cash Rate on hold at 1.50% per annum. There is unlikely to be any Melbourne Cup interest rate surprise this year, as the RBA board is expected to keep the Cash Rate on hold when it meets next Tuesday.

Global share markets were all in negative territory in October, with the United States' Dow Jones index falling by 5.1%, the London FTSE falling by 5.1%, the Japan Nikkei 225 falling by 9.1% and the Hong Kong Hang Seng Index falling by 10.1%. 

The fall in share market values in the month was largely driven by the United States’ Federal Reserve stance on interest rates.  The United States' central bank has raised interest rates three times this year, and is widely expected to increase rates once more before the end of the year.

Fears about rapidly rising rates caused the United States' stock market to drop significantly. The volatility in investment markets was also not helped by President Trump’s comments. When asked in a Wall Street Journal interview what he saw as the biggest risks to the United States economy, Mr Trump said:

"To me the Fed is the biggest risk, because I think interest rates are being raised too quickly"

The United States' Federal Reserve chairman Jerome Powell (and other economists) believe that the United States economy is strong enough that such monetary policy stimulus is no longer necessary – a change the United States' central bank highlighted in September by ending its description of its policy as "accommodative".

In isolation, the fact that the United States' central bank has enough conviction in its economy to support higher interest rates should be viewed as a positive.  It’s hard to conceive a situation whereby the United States' central bank will throw its economy back into recession, especially given the support provided throughout (and since) the Global Financial Crisis.

Added to the interest rate concerns noted above, was continued talk of increased United States-China trade restrictions. A Bloomberg report late in the month noted the United States' government was preparing for an announcement of tariffs on all US$257 billion of China’s remaining exports to the United States.  To date, actual policy details have not been announced.

From a domestic perspective, with China being a key trade partner, any increased tariffs (and reduction in China’s production of goods) would likely have a significant impact to the Australian economy.  In my view this, added with a falling housing market in Sydney and Melbourne, are the key risks facing domestic investors (rather than the United States' central bank interest rate policy, which I expect to pass over the coming months).

For more information, please contact Ryan Love on 1300 856 338.

This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.