Here’s Accru Financial Planning’s overview of key events affecting the global stock market this quarter – the slow pace of the US economy, the threat of a devaluation in the yuan and of course the impact of Brexit are all unsettling the market.
The first three months of 2016 saw the US economy expand at its slowest pace in two years.
The sluggish growth reflects cautious sentiment following the turbulent global economic and financial conditions experienced in the beginning of the year. There are concerns that the recovering US economy remains exposed to global economic slowdown and potential fallout from the transitioning Chinese economy.
Encouragingly, the low rate of growth is not expected to continue throughout the year, with indicators such as higher retail sales and rising home purchases suggesting improvements. Moreover, the housing sector remains a positive support for domestic growth, rising 1.9% in the first quarter, labour markets continue to tighten and inflation remains low.
The Federal Reserve has stated it will proceed cautiously with any further interest rate rises following its decision to increase rates from near zero levels in December last year for the first time in almost a decade. Its decision to keep rates on hold in early March was attributed to market volatility, record low oil prices and concerns about China. Moreover, a rate rise is likely to be delayed following the impact of Brexit on world markets.
Wall Street stocks have rallied and bond yields have fallen under growing expectations that rates will remain on hold for the next few months, reflecting the now familiar pattern in which markets celebrate signs of economic softness and Federal Reserve restraint.
Despite an overall rebound in the economy in the early stages of 2016, China remains an ongoing concern within the global economy. The threat of a more significant devaluation in the yuan is unsettling markets, with a 5% drop against the USD since October.
A crisis of confidence in Chinese policy makers to appropriately administer the transition from export, investment and real estate led growth to domestic consumption driven growth is also weighing on confidence.
Critics argue that the injection of credit and fiscal stimulus from the government serves merely to prop up the economy rather than provide for much needed economic and industrial reforms. Yet, the government remains steadfast in its assertion that they will maintain economic growth of 6.5% over the next five years.
2016 has so far seen promising increases in manufacturing, housing sales and construction. Steel production is at near record high levels despite growing pressure from the global steel industry to reduce production. The excess production not being consumed domestically is then sold through the world markets, impacting world prices. Strong iron ore imports used in steel production are favourable however, for Australian resource companies.
Europe & UK
The impact of the BREXIT hit hard across the world, but particularly in the UK. A record $3 trillion was wiped from global markets in just two days, the UK’s credit rating was downgraded to AA negative, Prime Minister David Cameron resigned and the pound fell to a 31 year low.
Pre Brexit, economic data from Europe showed modest, yet encouraging growth for the beginning of 2016. The Eurozone’s unemployment rate is gradually falling and Germany, Italy and Spain all reported their highest levels of growth in four years. Security concerns dominated the headlines however, following terrorist attacks in Brussels, Paris and now Turkey. Germany struggled following the influx of one million refugees, triggering a huge strain on resources and political opposition to Angela Merkel.
Please get in touch with your wealth management advisor if you would like to know how these events may affect your investment portfolio.