Instreet Market & Economic Commentary and Opinion
We all know that when taxi drivers start giving out investment advice it's time to sell out of the market. So, what about when the wisdom is being handed out by celebrity and reality TV star Paris Hilton…?
Hilton has come out endorsing the boom in crypto-currencies, tweeting last week that she will be backing the fundraising for LydianCoin – a digital token that is still at concept stage.
If you ask me it’s a pretty big warning sign that things are out of whack. The recent boom in crypto-currencies echoes speculative bubbles like the dotcom boom.
Last weekend, the Chinese government declared that Initial Coin Offerings are illegal and stopped any fundraising activities relating to virtual coins. This is the latest move by the Chinese government to curb the risks posed by unregulated areas of the financial system.
Bitcoin fell immediately as crypto-currencies are one of the few ways that Chinese nationals can move currency offshore. With 20 per cent of all Bitcoin transactions occurring in China, moves by the government to tighten regulation further poses a significant risk to Bitcoin and other crypto-currencies.
September volatility lower than normal
Despite ongoing geopolitical risk, equity markets have been calm in September so far. Traditionally, September is a time of high volatility yet our forecasts are predicating overall volatility of around 10.5 per cent. This is lower than the 12-month average of around 11.6 per cent.
What does 10.5 per cent actually mean? Well, we expect the ASX/S&P200 to move no more than around 77 index points in any given day. Further, we are not expecting a move of more than 171 index points in a week – so probably no crash.
Fund managers who have been waiting for the traditional September pullback may need to start buying equities at higher levels to ensure they meet their asset allocation targets.
By the time October rolls around, we may reach the lows seen in July and August. It’s possible, of course, that a geopolitical black swan event may emerge and change all of this. But these events rarely happen – unless of course you write that they don't happen; and then they are bound to happen.
Storms fallout for markets
Hurricane Irma will help support oil and gasoline prices, which had begun falling after Tropical Storm Harvey. Both storms will have an impact on US GDP for Q3 and Q4, but economic activity should recover quickly thereafter.
The US Dollar continues to weaken as the storms affect US GDP and create the need to rebuild. The market is starting to think that the US Federal Reserve (Fed) may put the December rate hike on hold in response. Fed fund futures are now pricing in no chance of a rate hike this year.
Saying that, the President of the European Central Bank (ECB) has started talking the Euro down whilst talking the Dollar up. It’s part of their plan to slow the rise – or even reverse the rise – of the Euro due to the risk this presents to the current improving economic climate in Europe – good luck with that Mr Draghi!
Meanwhile, there was some relief for markets this week with news that President Trump has reached agreement with the Democrats to fund the government until December 15 and avoid a default by providing a short-term increase in the debt ceiling.
Australian economy update
GDP in Australia saw an 0.8 per cent quarter-on-quarter rise for the second quarter. The gain probably overstates the health of the Australian economy as it also includes the pickup in growth that was artificially slow due to the tropical storms in North Queensland that occurred during the first quarter. The underlying rate of growth is probably more like 0.5 - 0.6 per cent quarter-on-quarter (or 2.2 per cent a year).
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