Aug 15, 2018 / News

Financial Planning

Market Update: August 2018

US growth has supported investment market recovery over the quarter, though the prospect of further US rate increases means recovery is tentative.

The US Federal Reserve (Fed) increased the fed funds rate by 25 basis points to 1.75%-2.0% at its June meeting. This is the seventh interest rate increase in the current tightening cycle that started in December 2015. The Fed is taking a very gradual approach to normalising interest rates consistent with economic developments and unfolding risks that may impact economic growth. Tightening was put on hold for a year after the initial increase in 2015 and again in the second half of 2017 when growth faltered and inflation pressures were largely absent.

The current phase of rate rises is being perceived differently by market participants. Wage and inflation pressures are becoming more prominent concerns in the US as the unemployment rate continues to trend lower and capacity constraints are becoming apparent after four years of uninterrupted economic growth. Current market expectations are that the Fed will increase rates at least two more times this year. This would still leave US official rates significantly below previous highs.

The impact of US inflation and interest rate fears can be clearly seen in the sharp falls in share markets earlier this year. There is, however, a continuing tug of war between these fears and the fact that higher inflation and interest rates are being driven by improved growth. Global shares have rebounded from March quarter weakness but the recovery remains tentative and volatile. The MSCI Developed Markets index will have posted three consecutive months of positive returns by the end of June following significant declines in February and March. As always, other developments have also influenced market behaviour with renewed concerns about the stability of the European Union following Italian elections being the major negative. In contrast, perceptions of risks associated with North Korean nuclear capabilities have significantly eased as the US and North Korea have made it to the negotiating table.

The major Australian development was the release of March quarter GDP results showing a seasonally adjusted 1% increase in the quarter and 3.1% growth compared to a year earlier. While the headline result was strong, the component parts did not suggest growth would be sustained at this higher level. In particular, the increase in inventories and the strength of government consumption expenditure in the March quarter are unlikely to be repeated. As such, the GDP result is not expected to prompt a reaction from the Reserve Bank of Australia (RBA), who have kept official rates unchanged at 1.5% for the past two years. Wages growth in Australia remains stuck at around 2% with consumer price inflation similarly subdued. As a result, most expect the RBA will keep rates unchanged through 2018.

The Australian sharemarket has matched the US market’s rebound since the end of March, although has been slightly more subdued over the past couple of months with the Resources sector posting strong returns while the remainder of the market has been held back by financial stocks and weakness in Telstra.

About us

EMFS was formed in 2001 originally to service the financial planning needs of the clients of Nexia Edwards Marshall, Chartered Accountants. In addition, we now service clients referred by other accounting firms, lawyers and clients who are not serviced by Nexia Edwards Marshall. We manage funds totalling about $250m on behalf of clients.

Liability limited by a scheme approved under Professional Standards Legislation. Contents of this publication are general of nature and are not intended to be used for decision making purposes. Edwards Marshall Financial Solutions Pty Ltd ABN 45 096 434 842 is an Authorised Representative of Edwards Marshall Advisory Pty Ltd ABN 18 600 878 555. AFS Licence No. 479 792.