In sharemarkets we have seen a period of volatility over the past few weeks which has seen mixed reports.  Some news was better than expected, and some economic data did not meet expectations.

The USA has seen better economic data, in particular improved employment figures.  This could represent a tipping point for the US economy in a positive direction, as better employment leads to better spending which improves business confidence, and businesses tend to invest and employ more when they are confident.  I don’t think we should celebrate just yet, but this is encouraging news.

China data is mixed, but overall shows a continued slowing of their economy which is why Australia has struggled.  A general slowing of such a large economy will have an impact on the world economy so a sudden change could have implications to watch out for.

Australia is suffering from lower commodity prices (iron ore, coal etc), which has helped our dollar to fall.  One of the biggest concerns is wage deflation which I have been noticing for some time.  Together with falling commodity prices there is now talk about the Reserve Bank lowering interest rates further.  I think a lot of the blame for the stagnant economy is how much the Government has been creating uncertainty in the economy through their policies.  I don’t think that is going to change anytime soon by the looks of things so there is a chance that government policies could tip the balance in favour of falling rates.  There are still risks to our economy, particularly in the face of a shock that arrives from overseas, but given the right government policies and good news from overseas, we could see our way clear of the worst.  Interestingly, the David Murray report on the banking world has shown that there are some significant changes to the way that banks may be required to operate to reduce their reliance on a Government bailout in event of a default.  Banks may face falling profits if the recommendations are adopted or they may have to increase interest rates to offset the higher costs the recommendations will incur.

Latest developments in Europe are a concern.  It appears that what the markets were expecting that a stimulus package would be implemented with little resistance, but it appears that there is a split in the board members of the European Central Bank which does not assure action.  Deflation is a real issue in Europe and the falling oil price is going to make that worse.  The ECB states that they will consider other alternatives for helping the economy if the this current amount of easing is insufficient to slow the move towards deflation.  If they take too long to fix these issues, voters in Europe will become further dissatisfied and we would expect to see a rise in anti-Euro sentiment which could lead to unpredictable outcomes, and therefore volatile sharemarkets.

Stuart Gilchrist – Director / Senior Financial Planner

Gilchrist Wealth Management

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