The threat of fresh tariffs caused a renewed bout of equity market volatility this week. It is slowly dawning on markets that trade tensions aren’t going away any time soon.
Ever since the Fed publicly changed its stance on interest rates in early January, equity markets have soared, rising more than 20%. Traders had begun to believe that the Fed was committed to easing interest rates and that the U.S. and China were working toward a trade resolution.
But neither of those events panned out exactly as investors had hoped. The Fed somewhat played down the potential for further interest-rate cuts after its move last week, while Mr. Trump vowed to extend trade tariffs to another $300 billion of Chinese imports. At the same time, corporate profit growth has softened this year amid a more challenging economic environment, especially among manufacturers.
Meanwhile, during this same period, the yield on the 10-year US government has plummeted from 2.8% to just 1.7%. This has made the 2% yield on stocks somewhat more attractive.
Second Term Trump
Markets are also adjusting to the increasing likelihood of a two-term President Trump. Betting markets have considerably shortened the odds of Trump 2020.This is the usual state of affairs in the USA as single term Presidents are rare. Expect the anti-China trade rhetoric to gather pace and for a growing intolerance to a rising US dollar.
Signs of Life in Australian Property
More evidence is emerging of a resurgent residential property market, driven by lower mortgage rates and scant supply. The lack of quality houses and apartments on the market is becoming an issue. This chart from Corelogic shows the recent rise and fall of Aussie residential property prices.
But cracks are literally starting to appear in the apartment market. Two high-rise apartment developers, the Ralan Group (Sydney) and the Stellar Group (Melbourne) have collapsed in the past few weeks as buyers of off-the-plan units have struggled to settle payments. Please take enormous care if you are considering purchasing an off-the-plan apartment. They rarely make economic sense.