Interest rate differentials between the US and Australia are set to narrow further, creating Foreign Exchange opportunities for investors
Overall, global equity markets are in a sweet spot. China, Japan and Eurozone Central Banks are looking at ways to maintain economic growth, while the United States has completed its quantitative easing and is looking at the appropriate time to raise official interest rates.
International oil prices declined 30% during October and November.
Part of the decline was due to OPEC’s decision to maintain current production levels and create oil price instability, which appears to be a long-term strategy to undermine the economics of higher cost oil production, including the US’s unconventional shale oil producers.
Globally, lower oil prices should also be a positive tailwind for improved consumer confidence as it transfers wealth from oil producing countries to developed market consumers.
We should see downward pressure on global inflation given that lower oil prices also have second round impacts on the prices of other commodities such as chemicals and goods with a large transport cost component. With lower fuel and commodity costs, households and many companies will have higher disposable income, or net earnings, which is positive for overall growth and for many listed equity sectors.
Lower inflation will also hold down interest rates lower for longer which will benefit economic growth, and the prices of growth assets. Low inflation will also stop bond yields from rising too quickly.
Overall, global equity markets are in a sweet spot. China, Japan and Eurozone Central Banks are either cutting interests or employing massive quantitative easing to maintain economic growth. This has been reflected in the Shanghai-Shenzen Composite Equity Index which rose 10.9% last month and Japanese and German indices also rose strongly.
The US has completed its quantitative easing and is looking at the appropriate time to raise official interest rates. In Australia, interest rate rises are a long way off and there are calls to actually cut rates further in 2015. This in turn augurs well for growth assets where valuations do not appear stretched and a low interest environment is supportive for equity prices.
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