Markets in for perfect storm

By Jack Derwin

September 27 2016
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Investors have been warned to expect heightened volatility over the next few months, with a combination of key events set to threaten market stability.

AMP chief economist Shane Oliver says the next couple of months are likely to be a perfect storm for markets.

“September and October are often rough months seasonally and various event risks loom in the months ahead including ongoing debate around the Fed, the Austrian presidential election, Italian banks, the Italian Senate referendum, the US election with support for [Donald] Trump edging up and global growth generally,” Mr Oliver said.

In Europe, the long-awaited Italian referendum will be held in October which will reveal whether the government will able to pass the reforms needed to encourage growth and reduce national debt which is currently sitting at 130 per cent of GDP.

If passed it would boost confidence that the government can deal with the looming Italian banking crisis, with the county’s nonperforming loans now totalling €360 billion.

A failed referendum, however, would have serious ramifications for Italy and its place in the EU, with eurosceptic party Five Star Movement continuing to gain political ground.

Meanwhile, focus is likely to increase on the US election with the first US presidential debate scheduled for Monday night (Tuesday morning AEST), in turn heightening investor anxiety about a possible Trump presidency.

Further speculation surrounds the US Federal Reserve and the impact of an anticipated rate hike later this year.

“Our base case remains for the Fed to hike at its December meeting, but this will require more consistently positive economic data from the US over the next three months. For share markets, the Fed remains broadly supportive, although volatility will no doubt increase again as we get closer to the December meeting,” Mr Oliver said.

Looking domestically, the housing markets in Sydney and Melbourne are expected begin to slow in the coming months.

“Dwelling price gains are expected to slow, as the heat comes out of Sydney and Melbourne thanks to poor affordability, tougher lending standards and as apartment supply ramps up,” Mr Oliver said.

Meanwhile, historically low interest rates continue to curb returns from cash and deposit for investors.

Despite these concerns, investors should see improvement in equities longer term.

“After any short-term weakness, we anticipate shares to trend higher over the next 12 months helped by OK valuations, continuing easy global monetary conditions and continuing moderate global economic growth,” Mr Oliver said.

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