Weaker global markets compound ASX's BHP woes, oil and gold weaker, ASX futures down 69 points

It's a trying time for just about every asset class presently, as many equity and commodity markets hover around 2015 lows. Australian bond prices have also continued to fall further since yesterday's strong employment figures, given that a more positive outlook for Australian interest rates would see outstanding fixed interest instruments devalued as the anticipation of higher interest rates would suggest better deals to come via new issuance. This confluence of weakness in asset prices means that very few investors will be having a blast right now, and BHP's exposure to the Brazilian mining disaster has put the boot into the guts of ASX performance.

The Aussie market as a whole has really gone nowhere in the last two and a half years, but while this sounds a bit grim, we can be thankful at this stage that the cooling off of commodity prices and the continued regulatory pressure on banks hasn't dragged the real economy into recession.  While second-quarter GDP in Australia was disappointing, third-quarter GDP is due out in just under three weeks and the consensus forecast stands at around 0.5% quarter-on-quarter, which would bring annualised growth within the range of expectations that sit between 2% and 2.2%. It's important to focus on the underlying economy at times like these because while the 'listed economy' can take a beating due to the combination of poor sentiment and poor corporate performance, an economy showing no signs of extreme stress should provide the resources for corporations to get their butts into gear and chase profits.

Further to the current economic environment, the latest Reserve Bank of Australia (RBA) forecasts--outlined in this month's Statement on Monetary Policy--are quite high, possibly too high, which gives them scope to prepare markets for higher rates even if they do not eventuate as quickly as suggested. The RBA has annualised GDP growth forecasts of between 2.25% and 3.5% for the next four quarters - so one of two things is going to happen: Either the Bank turns out to be correct and the underlying economy fuels increased consumer and business sentiment; or, the Bank gets it wrong and is forced to pin rates at 2% for longer or even drop them as low as 1.5%. Neither are particularly unsavoury outcomes for investors, so I think there truly is merit in looking beyond this soft patch in equity markets and continuing to go about the job of managing a portfolio of companies and instruments that you love.

You'll notice in the table below, taken from the aforementioned Statement, that the Bank makes no great attempt to forecast inflation. At this stage, inflation is not giving the Bank the mandate to raise rates, even with their estimates based on Brent Crude oil prices US$8 above where they are trading right now. Depressed energy prices are key to keeping headline inflation low, and ultimately helping to lower manufacturing input costs. So investors should continue to keep an eye on medium term oil price averages to gauge the likelihood of rate hikes. As much as the US and Australia have touted inclinations to raise rates, low inflation has kept both economies from actually doing so.

Lastly, the Aussie dollar has received a nice little bump from the latest employment report, which has held up well overnight. This is shown on today's second chart.


Source: RBA, Rivkin, Saxo Bank

To view the Rivkin economic calendar and Global Markets matrix, members can click here.

This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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