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Market Update Jan 2017 – What happened in December 2016

In Australia, the RBA left interest rates on hold at 1.5%. The signals from the RBA continue to suggest that the hurdle to another rate hike is high and the most likely outcome will be rates on hold for all of 2017.

Australian GDP growth showed a surprising -0.5% figure for Q3 2016, well down from +0.6% for Q2 2016. This was only the fourth quarterly negative print in the last 25 years and took the annual rate of growth down sharply to 1.8% pa from 3.1% pa.

US (and global) financial markets continued to be driven through December by the Presidential election victory for Donald Trump in early November. Financial markets focused on the stimulatory policies expected under President Trump, including significant company and income tax cuts, increased infrastructure spending and reduced regulation. The more concerning policies around trade, immigration and climate change look to be considered secondary factors at this stage.

The other big news impacting on markets in December was the US Federal Reserve’s decision to raise interest rates by 0.25% to a range of 0.5% to 0.75%. This was only the second rate hike in 10 years. The Fed also increased their forecast for future rate increases with three rate hikes now expected for 2017 (as opposed to two).

Given that we now expect the US economy to experience a significant easing of fiscal policy from late 2017 onwards, which pushes inflation higher than previously expected and brings forth the need for more tightening from the Fed, we could well be in for more rate hikes from the Fed in 2017 and 2018.

In European politics, the focus in December was on the failed referendum in Italy that was designed to make it easier for the government to implement (much needed) economic reforms. The failure of the referendum saw Prime Minister Renzi resign.

The Australian dollar was weaker against most currencies throughout December driven by its relative position against the stronger USD, but somewhat supported by improvements in commodity prices and general expectations that the RBA interest rate cutting cycle is at an end.  The AUD ended the month down 2.4% against the USD at $US0.72, as well as the sterling (-1.1%), the Euro (-1.9%) and the Yen (-0.4%).

Most commodity prices rose in December, helped by both the OPEC deal to try and limit oil supply and positive expectations, especially on infrastructure spending, from a Trump Presidency. Oil prices rose 8.7% to $US53.7 a barrel and iron ore rose 9.4% to US$78.9 a tonne. However precious metals prices declined with gold falling 1.8% to end the year at US$1,152 an ounce.

The Australian share market continued its strong momentum, rising 4.1% to hit a 12-month high.

Global developed market shares were also 2.3% stronger in USD terms (+4.8% in AUD terms) as the ‘Trump rally’ continued.

Conversely, emerging market equities were weaker falling -0.1% in USD terms. USD strength, higher bond yields and concerns around US trade policy all continued to weigh on emerging markets, despite the strength in commodity prices.

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