1 Benchmark data are UBS Bank Bill Index (cash), UBS Composite Index (Australian bonds), Barclays Global Aggregate hedged to $A (global bonds), S&P/ASX200 A-REIT Accumulation Index (Australian property securities), MLC global property strategy benchmark hedged to $A (Global property securities), S&P/ASX200 Accumulation Index (Australian shares) and MLC global equity strategy benchmark (MSCI All Country Indices hedged and unhedged in $A).
The great irony at the moment is that good news is causing sharemarkets to react badly and bad news is often causing sharmarkets to react positively!
We are constantly asked why decisions in the United States affect Australia so significantly – particularly considering our sharemarket has performed strongly over the past 12 months.
At the time of writing, this all stems from the fact that the US Federal Reserve is expected to wind back, or ‘taper’ the economic stimulus it is providing to their economy. If the Fed can commence to wind back its stimulus program, this signals the ‘all clear’ for the US recovery – great news for the global economy, given that America is still by far the largest economy on the planet. For a medium sized trading nation like Australia, this is very positive news.
However, in the short term, this ‘tapering’ would make it more expensive for people to borrow money, which causes markets to react negatively. Its important to focus on the ‘big picture’ – that is, it is extremely good news that the US economy might have recovered to the point it can be taken off life support!
Tapering is the buzz word to describe the Fed starting to reduce the amount of additional stimulus each month, e.g. to $65bn from its current $85bn. It does not represent a tightening of monetary policy but a ‘turning down of the tap’ of additional monthly stimulus. Policy tightening is probably years away.
The Australian dollar (AUD) is also affected. Higher US bond yields have been attracting money back to the US, taking advantage of the higher rates. To do so, foreigners needed US dollars, bidding the US dollar higher. A higher US dollar, other thing equal, means a lower AUD.
The great irony at the moment is that good news is causing sharemarkets to react badly and bad news is often causing sharmarkets to react positively!
We are constantly asked why decisions in the United States affect Australia so significantly – particularly considering our sharemarket has performed strongly over the past 12 months.
At the time of writing, this all stems from the fact that the US Federal Reserve is expected to wind back, or ‘taper’ the economic stimulus it is providing to their economy. If the Fed can commence to wind back its stimulus program, this signals the ‘all clear’ for the US recovery – great news for the global economy, given that America is still by far the largest economy on the planet. For a medium sized trading nation like Australia, this is very positive news.
However, in the short term, this ‘tapering’ would make it more expensive for people to borrow money, which causes markets to react negatively. Its important to focus on the ‘big picture’ – that is, it is extremely good news that the US economy might have recovered to the point it can be taken off life support!
Tapering is the buzz word to describe the Fed starting to reduce the amount of additional stimulus each month, e.g. to $65bn from its current $85bn. It does not represent a tightening of monetary policy but a ‘turning down of the tap’ of additional monthly stimulus. Policy tightening is probably years away.
The Australian dollar (AUD) is also affected. Higher US bond yields have been attracting money back to the US, taking advantage of the higher rates. To do so, foreigners needed US dollars, bidding the US dollar higher. A higher US dollar, other thing equal, means a lower AUD.
