Market Update: October

Snapshot

  1. RBA cuts interest rates to record low
  2. Housing recovery gains traction
  3. Low rates and high volatility – The new norm?
  Opening Value at

4 September 2019

Closing Value at

2 October 2019

Movement % Change
ASX200 6,573.40 6,742.85 169.45 2.58%
Dow Jones Index 26,118.02 26,573.04 455.02 1.74%
NASDAQ 7,874.16 7,908.68 34.52 0.44%
AUD USD 0.6764 0.6704 -0.0060 -0.89%
Gold (AUD/oz) $2,260.69 $2,207.26 -$53.43 -2.36%
RBA Cash Rate 1.00% 0.75% -0.25%

RBA cuts interest rates to record low

The Reserve Bank of Australia has announced that it has reduced the official cash rate to a historic low of 0.75 per cent. This follows consecutive rate cuts in June and July meaning the cash rate has halved in just four months.

In its statement on Tuesday, the RBA said that they “took the decision to lower interest rates further to support employment and income growth and to provide greater confidence that inflation will be consistent with the medium-term target.”

The reduction of the cash rate has come despite evidence of an improvement in the housing market with property values up 3.5% across Sydney and Melbourne in the last three months.

Analysts are expecting another cut by early next year.

The US Federal Reserve cut interest rates in September for the second time since 2008 on the back of slowing global growth and rising trade tensions. Fed Chairman Jerome Powell is walking a delicate line as the strong outlook for the US economy, supported by historically low unemployment figures, contrasts with a slowing global economy preparing for a protracted trade war, without considering the exorbitant political pressure for further rate cuts from President Trump.

Housing recovery gains traction

According to Tim Lawless, head of research at CoreLogic, “The rebound in housing conditions should help to support an improvement in economic conditions as higher housing prices translate to a wealthier and more confident household sector who will hopefully be inclined to spend more.”

However, CoreLogic also suggested the recent evidence of a strong rebound in house values in Sydney and Melbourne still wasn’t enough to “stave off a rate cut”.

A trend towards higher unemployment and a slowdown in jobs growth were likely the primary factors in the RBA’s decision to cut rates to a new low, as well as concerns around persistently weak household spending, subdued wages growth and low inflation,” he said.

Auction clearance rates have remained strong over the past few months hovering around the mid to high 70% range as buyers try to snap up properties before prices rise further. This is still being driven by a shortage of houses, with the number of properties for sale still 10% less than a year ago.

For those not convinced that the property market has bottomed, Spring will be the time to tell as more stock becomes available, potentially making it a buyers’ market again.

Low rates and high volatility – The new norm?

Economies across the developed world have entered into a period of low, but sustained growth, with the current expansion being the longest on record, but actual GDP expansion has been relatively subdued. This can be put down to four main factors, ageing populations, high debt levels, technological advances and banks deleveraging resulting in an overall more conservative economy with low levels of inflation helping to keep a lid on growth levels, with Australia recently recording its slowest annual GDP growth since the GFC.

With GDP growth slowing and inflation remaining stubbornly low, central banks across the globe are easing monetary conditions in an attempt to boost these figures and continue the current expansion. However, the record low-interest rates have resulted in some unintended consequences, with lower risk-free rates forcing investors to pay more and more for “reasonable returns” with this phenomenon referred to as the TINA (There Is No Alternative) trade.

Rising valuations have resulted in volatile reporting periods, with more than 35% of Australian companies experiencing stock price moves of more than 5% on the day they report results according to JPMorgan. As investors are forced to pay more and more for companies, they are increasingly priced for perfection, with any variance in company results compared to market expectations likely to continue resulting in relatively dramatic share price movements.

With interest rates set to stay lower for longer, it’s fair to ask if high valuations and increasing volatility is becoming the new normal.

 

Author: Troy Jones
Author: Lauren Chan