The Australian share market recorded its first negative month of the year, with the All Ordinaries index falling by 2.9% in August to close the month at 6,698.2 points. The Australian Dollar continued its recent trend falling by 1.7%, with 1 Australian Dollar currently buying 67.36 US cents.
The Reserve Bank of Australia (RBA) board kept the official Cash Rate on hold at 1.00% per annum in August. The RBA board meets again this week, with most expecting rates to remain on hold at least for another month.
Global share markets were all negative in August as the United States and China ramped up their trade war and the United States yield curve inverted (a measure often used to gauge the likelihood of a recession). In the month of August, the United States Dow Jones index fell by 1.7%, the London FTSE fell by 5.0%, the Japan Nikkei 225 fell by 3.8% and the Hong Kong Hang Seng fell by 7.4%.
Given the media attention over recent weeks, you would be forgiven for thinking that there was an extreme fall in local and United States’ share market values. The reality is that for the last three months, share market returns have been quite strong as shown in the chart below (with the local market up more than 4% and the United States market up more than 6%).
Source: Yahoo Finance
The key source of the volatility in investment markets remains United States and China free trade.
It is worth remembering that it was the United States that started the tariff war with China, arguing that China has been unfairly treating United States businesses for many years by running a ‘closed economy’, taking advantage of an ‘open economy’ in the United States, and not protecting United States intellectual property.
Whatever the merits of the arguments, share markets hate uncertainty and sentiment is a big mover of day-to-day markets.
In May this year, the International Monetary Fund suggested that tariffs on all trade between the United States and China would subtract only 0.3% from global economic growth. Therefore, from a macro-economic level, the tariffs will not have a material impact on the global economy (and the losers will be consumers in the United States and China).
The real risk it would seem is sentiment. Just as sentiment can affect investor behaviour, it can have an impact on corporate confidence, which may weaken corporate investment, weaken share markets and become ‘self-fulfilling’, leading to negative impacts on economic growth.
‘Dow tumbles 800 points after bond market flashes a recession warning’
‘Stocks Suffer Worst Week of Year on Trade’
‘Australian stock market down 2.4% as US-China trade war hits home’
‘Stock Markets, Jolted by Economic Worry, Suffer 2nd Worst Drop of 2019’
Above are just a few example headlines that I happened to see in the month. It is fair to say that such headlines do little to improve investor sentiment.
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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.