Market Insights

Consumer Price Inflation could move higher globally if the recent surge in oil prices continues, with Brent crude at its highest level in three years. The net effect on inflation could be a rise of around 0.3% although, like all commodity price moves, the impact on inflation shouldn’t last long. Importantly, it’s unlikely to affect the global economic outlook which has been driving stocks higher. Buoyant Euro pushes higher The Euro has had a good start to 2018 getting close to its highest level against the US Dollar in three years. The latest rise was prompted by German Chancellor Angela Merkel’s unveiling of a coalition deal between her conservative bloc and the Social Democrats.
The main game in December will be the expected rate hike by the US Federal Reserve. Fed Chair, Janet Yellen, has acknowledged that the unexpected weakness of core inflation this year “could reflect something more persistent”, however she points out that it is likely due to “transitory factors”. This view, along with the boost to activity from US tax reform, leads us to believe that the Fed will raise rates four more times in 2018. The US Senate passed the Bill for tax reform on the weekend, paving the way for change in the US tax rules. The House and Senate now need to reconcile their Bills and there is a 90 per cent probability that it will go through. Whilst the final details are not yet known, the market is hoping for a corporate tax rate of 20 per cent.

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.

The US Federal Reserve (the Fed) is likely to raise interest rates in December following a series of strong employment indicators. The latest results were skewed by the effects of Hurricanes Harvey and Irma, but if you remove these factors the numbers look good.
Take for example non-farm payrolls, which declined by 33,000 in September – far worse than the consensus forecast but driven by the hurricanes. If past storms are any guide, employment will rebound markedly over the next few months.

The decision by the US Federal Reserve (Fed) on Wednesday to keep interest rates unchanged was expected by the market, as was the formal announcement of its balance sheet normalisation process. At just $10 billion per month (initially), the pace of run-down will be so gradual that the latter is unlikely to have a major impact on the economy or financial markets.
The bigger news, of course, was that Fed officials continued to indicate that there will be one more 25 basis point rate hike by the end of the year. This comes despite the weakness of core inflation in recent months.

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.

It’s been a quiet couple of weeks in markets with most of the action happening in FX. The Euro keeps on going from strength to strength and is now trading above $1.19. The upward trajectory of the Euro is the opposite of what the market was expecting – that is, a stronger USD against all major currencies.
A similar series of events is playing out in the 10-year US government bond market, which has experienced a bond prices rally as yields fall. These are strange events given the current environment of rising interest rates, tighter labour markets and higher inflation. I don't think that the rally in US bonds will last. Although I may be eating my words in a few weeks’ time.

Forget the war of words taking placing over North Korea, eyes are turning to the crisis unfolding in Venezuela. That includes the eyes of President Trump who it seems wouldn’t rule out military intervention. This comes despite the US skipping the recent Lima meeting between 12 countries from the American continents, which gave the market the impression the US would take a back seat when it came to sorting out the issue.
Venezuela is a country rich in oil which exports mainly to the US. Any disruption to that supply will prompt the price of oil to rally globally and affect the share price of energy companies.

The Australian dollar’s (AUD) strong rally in recent weeks has caught the market by surprise and signs show that it could push higher – possibly even hitting US$0.85. That’s a big jump compared to US$0.80 today and just US$0.74 back at the start of June.
The strength of the currency reflects a few main factors:

US and global stocks are trading at record highs as markets continue to climb a wall of worry. Also volatility continues to fall rapidly and the VIX (Chicago Board Options Exchange Volatility Index) is back to the near-low levels it reached a few months ago. Of course, whilst investment sentiment is improving, it is nowhere near euphoric.
Markets will keep a close eye on the US Senate this week to see whether it passes the new US healthcare bill. Getting this bill through the senate is a test case for the Trump administration. If the Republicans are successful in winding back Obamacare, they will have a greater chance of getting their next major initiative – tax reform – passed.