Economic update

The Australian market continued to lag international markets through the September quarter as the S&P/ASX 200 index struggled to break out of its narrow trading range.

Australian market subdued

The Australian market continued to lag international markets through the September quarter as the S&P/ASX 200 index struggled to break out of its narrow trading range. This can be attributed to mixed economic indicators. Business confidence was weaker, falling below its long term average for the first time since mid-2016. This was due to concerns over customer demand, margin pressure and government policy. Business confidence did lift in September with the construction industry leading the way but the retail sector continues to struggle.

Consumer confidence is also weak and remains in pessimistic territory due to concerns over housing affordability, interest rates and rising energy prices.

More sanctions for North Korea

Recent North Korean actions have prompted a global response in order to tighten the screws on the country. The UN Security Council has adopted new sanctions on North Korea including limits on oil exports to the nation, a ban on textile imports and the prohibition of work authorisations for North Korean citizens working overseas. China has also ordered North Korean companies operating within China to close up shop within 120 days, a shift in the close relations the two nations have held since the Korean War (1950-1953). If enforced, the order will have a significant impact on the North Korean economy given that China is its largest trading partner.

Investors have not been deterred by the escalation in geopolitical tensions with North Korea. Markets seem to have grown immune to hydrogen bomb tests and missile launches for example. While North Korea remains a tail risk for financial markets, it’s unlikely that markets will be significantly affected unless the situation evolves into armed conflict.

German federal election

At the outset of 2017, the German federal election was viewed as a key risk to financial markets due to the rise of populist and anti-EU political parties during the last few years. However, Angela Merkel’s centre-right Christian Democratic Union (CDU) party held a commanding lead in the polls from April onward. Financial markets therefore anticipated that Merkel’s CDU party would claim the most seats in the Bundestag (national parliament) and would retain the position of Chancellor of Germany that she has held since 2005. Polls got the call right and as a result the market reaction was muted.

The election result did surprise investors in one respect. That is, the election result followed the widespread occurrence over recent years of right wing parties gaining support thanks to regional voters and those who do not normally vote. Although Merkel won the election, it came at a cost because her campaign had poorly defined initiatives regarding social security, unemployment and economic welfare. While markets expected Merkel to win the election, they did not expect such strong support for the right wing party which highlights the fact that populist parties have gained supporters and the risk of protectionism has not disappeared.

Speak with your financial adviser to discuss your investment options.

Source: IOOF

Published by: - /

Share this page