The stumble in equities markets in late January in response to rising bond yields and concerns that inflation could re-emerge more strongly than expected was a timely predictor for the US equities market rout that took place on 5 February before spreading to other markets.
The fall appears to be based more on valuations looking stretched than a change in economics and fundamentals. Reasons behind the rise in bond yields have generally reflected positive economic news and growth prospects.
Although still relatively low, it would appear that volatility has returned to equity markets after what has been a relatively benign period. While markets rallied post the initial fall, there is a risk that if markets over-react to the potential of higher US inflation later this year, there could be further falls and a flow-on effect beyond equities.
At the Central Economic Work Conference, the Chinese leadership said the government would keep economic growth within a reasonable range with markets expecting growth of around 6.5% in 2018, declining slightly in 2019. The politburo also confirmed that eradicating poverty, fighting pollution and curbing financial risks as key economic priorities for 2018.
In Japan an announcement of the nominees for the two deputy-governors and BoJ governor is expected during February, with current governor, Hanuhiko Kuroda expected to be the next BoJ governor. Spring wage negotiations also commence in February with expectations of a modest increase of 0.7%, excluding seniority-based increases of around 2.3%.
In his February statement on monetary policy, RBA Governor Philip Lowe said that Australia can expect a gradual reduction in unemployment and return to target levels for inflation. Domestic annual growth is likely to average just over 3% per annum over the next couple of years. The Board left the cash rate unchanged and analysts believe any rise is most unlikely until late 2018.
This publication is produced by the MLC Investment Policy Team and issued by MLC Wealth Management Ltd and its related companies and entities for the intended informational use by financial advisers. Whilst due care has been taken in preparing this report, Australian National Consulting, ANC Wealth and MLC does not warrant or represent that the information, opinions or conclusions contained in this report are accurate, reliable, complete or current. This report is general information only and has been prepared without taking into account an investor’s individual objectives, financial situation or needs. The report should not be taken to contain securities advice or recommendations. Past performance is no indication of future performance.