Investor confidence lifts

Instreet Market and Economic Commentary and Opinion

October is typically a time when markets rise, and this October has been no exception with the Australian market up eight sessions in a row, the US Dow Jones Index moving past 23,000 for the first time, and the MSCI World Index making new highs last week. We can also see from the investors in Acorns that retail investor confidence is improving.

All the gains aside, it is still an unloved rally and until taxi drivers start talking about shares there is still room for markets to continue to rally.

Fundamentally, corporates earnings continue to improve – even in the United State where there is less slack. Riding the wave of improving global growth, this earnings growth is supporting equity markets.

One risk to the market is the collapse of the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico, with renewed fears that negotiation talks may break down. In the event no deal is struck, trade would revert to World Trade Organisation (WTO) rules, which would see the most favoured nation tariffs applied to Mexico's exports to the US.

Spain moves to control Catalonia

Over the weekend, the Spanish Prime Minister announced he will sack the entire Catalan government and call new regional elections within six months. This extreme move, designed to crush the regional independence movement, needs to be ratified by the upper house of the Spanish government.

The announcement by Mariano Rajoy will escalate the situation in Spain and it is possible that the Catalan government will not comply.

Japan to keep Shinzo Abe

Prime Minister Shinzo Abe of Japan looks set to remain in power with another large majority in the Japanese general election.

His choice for the next governor of the Bank of Japan will likely be another proponent of monetary easing. This would see Mr Abe roll out his pledged election manifesto to go ahead with a sales tax hike in October 2019, whilst increasing spending to soften the economic impact.

Australian jobs strong

Last week's employment report showed that September's 19,000 rise in employment marks the seventh consecutive month of strong job gains in Australia. It leaves little doubt about the current health of the labour market or the economy. The unemployment rate fell back from 5.6% to a four and a half year low of 5.5%, yet there is no sign of a pick-up in wage growth any time soon.

We expect third-quarter CPI inflation figures for Australia (due out Wednesday) to show that underlying inflation nudged up from 1.8% to 1.9% and that headline inflation held steady at 1.9%.

China

Official figures in China show that GDP growth has slowed slightly from 6.9% year-on-year in Q2 to 6.8% year-on-year in Q3. China Activity Proxy indicators tell a broadly similar story as the official numbers, so the figures are believable. The slight fall is not a sign that China is falling off a cliff and so there is no need for investors to panic. Indeed, Chinese industrial production growth picked up from 6.0% to 6.6% year-on-year and retail sales growth edged up from 10.1% to 10.3% year-on-year.

 

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