Risk assets were stronger mostly through September assisted by further signs of moderate global economic expansion, easing geopolitical tensions in the Middle East and a surprise decision by the US Federal Reserve (Fed) at its September policy meeting to delay tapering of its $US85 billion asset buying program. In the US, the looming political impasse over the budget and the debt ceiling had relatively small impact on market sentiment in September, although in early October the US government shutdown has started to weigh on risk assets. In Australia, the Coalition’s strong lower house election victory reduced uncertainty assisting local risk assets. Major sharemarkets rose in September between 0.8% for the British FTSE 100 and 8.0% for Japan’s Nikkei. The Australian sharemarket rose over the month and the ASX 200 lifted by 1.6% with the index touching a 5-year high at one point. On an accumulation basis, including dividends, the Australian sharemarket made a record high in September.
Credit markets were mostly stronger through the first half of September improving in line with sharemarkets, but gave up the gains in the second half of the month finishing little different from the end of August. Longer term bond yields rallied briefly after the Fed’s policy meeting decision, but the improvement was short-lived. The Australian 10-year bond yield moved back up above 4.00% at the end of September. Early in the month, the RBA left its cash rate unchanged at 2.50% and in the accompanying statement watered down its guidance on the likelihood of any further rate cuts in this cycle.
On the economic data front, US indicators remained mixed in September, although manufacturing PMI readings turned higher hinting at strengthening output ahead. Data released in China and Europe continued to surprise on the upside of general expectations. In China, industrial output improved again in August, particularly in areas such as electricity generation and steel production. In Europe, the number of people unemployed fell for a second consecutive month in August. German Chancellor Angela Merkel’s strong election victory also helped reinforce expectations that Germany will continue to support the euro and extend help to peripheral European economies when needed.
Looking ahead, an otherwise improving global growth outlook is marred in the immediate term by the closure of some government offices in the US as the political stalemate over the 2014 Budget and extending the government debt ceiling drags on. Some compromise is likely by the 17th October key date after which US Treasury runs out of funding options. Whatever compromise is reached, it may coincide with other risk asset friendly developments – another favourable quarterly company reporting season in the US, plus further improvement in China’s monthly economic readings with a Q3 GDP report where analysts expect growth to accelerate to 7.7% y-o-y from 7.5% in Q2. In Australia, low interest rates are already driving stronger housing activity and retail sales appear to be strengthening. The likely reduction in mining investment spending is also starting to look less pronounced than widely feared. The RBA would appear to be on a solid policy hold and we expect no more cash rate cuts this cycle and a first rate hike in Q3 2014.