MLC Senior Economist Bob Cunneen speaks to MLC Portfolio Specialist Sinead Rafferty about American and European central banks cutting interest rates.
Sinead Rafferty: Welcome to this month's Economic Update. I'm Sinead Rafferty, Portfolio Specialist at MLC, and I'm joined by our Senior Economist, Bob Cunneen. Welcome Bob.
Bob Cunneen: Hello Sinead.
Sinead Rafferty: Bob, it was a strong month for global share markets in September after a poor August. What occurred?
Bob Cunneen: Well, a couple of factors supported global shares rising about 2 per cent for September. The main factor was that the American and European central banks cut interest rates by a quarter percent, so that was particularly helpful. Also, the trade tension between America and China sort of abated in September. They have agreed to resume negotiations in October, so those trade concerns have gone on a bit of the back burner at the moment.
Sinead Rafferty: With the cut that we saw out of the US Federal Reserve, was that driven by slowing global demand or is it that the trade tensions are starting to hurt the US consumer?
Bob Cunneen: It was essentially the Fed highlighted global developments. There's a combination of factors behind that. Obviously the US-China trade tension. There's also concerns about Brexit. There's concerns about Hong Kong protests. The China slowdown story. All these factors have weighed on the Fed, the central bank, cutting interest rates, but they also cited muted inflation pressures. From their point of view, inflation is still below their 2 per cent target, so they think they've got scope to lower interest rates and sustain the American economy's expansion.
Sinead Rafferty: What about the Chinese share market? It drifted lower in September. Are they implementing some stimulus measures?
Bob Cunneen: Yes, they are. The Chinese central bank announced that they will lower the reserve requirements that banks have to hold cash at the central bank. This is very helpful for bank lending; it encourages Chinese banks to lend to corporations and consumers. It indicates that there's more monetary stimulus in the system, which should support Chinese economic growth.
Sinead Rafferty: Not to be left out, the European Central Bank also cut interest rates. How did their share market react?
Bob Cunneen: Europe was the outperformer in September, it was up about 3.6 per cent, and that largely reflects that European Central Bank rate cut. They cut interest rates by 0.1 per cent to -0.5 per cent. Extraordinarily low. They also resumed asset purchases, so they're going to buy 20 billion per month of government bonds, and, again, putting downward pressure on government bond yields in Europe, which should be helpful for the share market.
Sinead Rafferty: Then finally, what about the Australian share market? How did it do in September?
Bob Cunneen: Australian share market was up about 1.9 per cent, and there's a couple of key outperformers. Firstly, financial shares, they were up about 4.5 per cent, largely on the back of the stabilisation in the housing market. In particular, Sydney in Melbourne in the last couple of months, house prices have risen with the Reserve Bank cutting interest rates in June and July. We also saw the Reserve Bank signal lower interest rates were ahead in September, and we actually saw that interest rate cut occur in October. So that was very helpful for the share market in particular. Against that, Australian Property Trust disappointed, they were down close to 3 per cent, but we have to bear in mind they've had an extraordinarily strong run this year, so they had to give back some.
Sinead Rafferty: Thanks for your time, Bob.
Bob Cunneen: Thank you very much, Sinead.
Sinead Rafferty: And thank you for joining us.