Markets: The Week That Was

What were the top three issues affecting market minds this week?

This week, our market was largely driven by broader global economic news. Reporting season is underway, but so far no significant surprises to jolt the market in a particular direction.

Taper tantrums

With the US economy continuing to spit out improving economic data, markets globally got the jitters midweek fearing that the Federal Reserve would wind back its $85 billion a month bond-buying program. At the height of this, the Australian market lost 94 points, or 1.85 per cent, on Wednesday.

Markets globally were down on concerns the withdrawal of the quantitative easing program would cause US interest rates to start rising, providing investors with an alternative to equities. Sometimes markets can too focused on the immediate – the gradual reduction in bond buying is actually better for global economic growth over the longer term as we can return to a more normal state of supply and demand.

Late September is the next monetary policy meeting in the US and Ben Bernanke, chairman of The Fed, will give an update on the program. We can expect whippy markets until then.

China confidence

On Thursday China reported an increase in both imports and exports, helping our market close more than 1 per cent higher for the day. The news also snapped three days of losses for the Dow Jones, which was also having a taper tantrum.

Concern over China’s growth has caused commodity prices to be volatile for the most part of this year. The positive trade data assured the mining sector and, consequently, they were up strongly on Friday in an otherwise flat market as commodity prices rallied on the back of this news.

Rate cut

As expected, the RBA cut the official interest rate to 2.5 per cent on Tuesday, an all-time low for Australian rates. With the property market strengthening following previous rate cuts, we are waiting for the broader economy to show similar signs that rate cuts are working.

If our market follows the path of the US with lower interest rates, we are set for some strong gains. The view of Australian equity strategists is conflicting, suggesting a flat market for the near future.