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The Cycle Goes On

The first quarter of the 2019 Financial Year was a continuation of what we have been seeing.

Australia lost another Prime Minister, there is still no deal for Brexit and Trump is in a battle with almost everyone (although Melania suggests his extra marital affairs are fake news).

The repeated attacks on legitimate news sources is a worrying trend. One of the pillars of a free society is freedom of the press and there is no doubt that Trump wants to make people doubt media reports, so he can fabricate whatever version of the facts that suit him. It seems that you can be caught red handed these days and still claim fake news.

Our whole system is built on trust and if that trust breaks down, we will have real issues. At the moment, people just believe whichever story they want to believe, including information from the most dubious sources.

It is very dangerous if people can spread lies and discredit reasonable sources.

In the next quarter, we have the US mid-term elections coming up. The Senate looks secure, but what happens in the House is less clear. Trump and the Republicans could lose majority control and we will be stuck with governments that cannot do anything.

Economic growth and company earnings have been very strong in the US. Even in Australia, employment growth has been remarkably good and economic growth has been very solid as well. Oil prices have moved up and iron ore prices have remained very steady.

However, the long period of slow, but positive growth and low interest rates seems to be nearing the end and when there is change, volatility and uncertainty increases.

The US Federal Reserve is consistently increasing interest rates and interest rates are hugely important in financial markets. Short-term interest rates impact on spending and long-term interest rates are what assets are valued against.

While Mexico and Canada got the trade deal with the US done, China is standing strong and it is not clear how this will end up. No one wants a trade war, but no one wants to look weak before their people either. The markets are becoming increasingly unsure how it will turn out.

Emerging markets are having trouble. They have made the mistake (we have seen this before) of gouging on cheap debt and what is of greatest concern is that some of this debt is in $US, so as the $US increases the interest bill gets bigger. When you have binged on debt in another currency, there are fewer policies that the government and reserve bank have available to control any problems.

The main issues that we face have not changed greatly over some time. We are just further along the path:

– Australia’s property market continues to weaken, and the main question is whether it will be a long slow drag or something worse;
– Interest rates are rising in the US and the Trump stimulus occurred when the economy did not need it;
– Inflation is almost where the Australian and US Reserve Banks target. US rates are rising, but the RBA is too fearful of problems in the housing market to move;
– Europe is improving, but still troubled with Italy the latest concern. The reality is a monetary union, without a fiscal union, is not a good system;
– Trump could push the bluff and bluster too far, and cause a trade war he really does not want;
China is slowing; and
– We are getting closer to a Labor government with several policies that will have major economic and financial market implications, most notably capital gains tax and negative gearing (the policy may be reasonable, but the timing is questionable).

Balancing against this is continued strong profit growth in the US, making the upcoming US reporting season particularly important in the direction of markets. Analysts will be looking to see if higher costs, such as oil, start to creep in to earnings reports and to what degree this is offset by strong revenue growth. This story is expected to continue if tariffs kick in and increase the costs of company inputs.

Please contact your Intralink Wealth Management adviser on (03) 9629 1100, if you require any clarification or further information on any of the discussed topics.

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