The US economy is witnessing a boost and is expected to witness growth at a faster pace than the rest of the world as it is backed by the solid fundamentals. The country’s benchmark 10-year yield was boosted on the back of strong macro-economic data released on October 3, 2018. The wage growth in the economy is expected to continue thus, improving the outlook. Would that be a concern for the emerging economies? Certainly, yes. The appreciation of the US dollar as well as elevated oil prices are some of the major headwinds for the growth prospects of the emerging markets or EMs. Amidst all this, let’s not forget about the global growth which might get derailed because of the fears looming around the trade tensions between the United States and China.
In the last meeting of the Federal Reserve, the chairman reflected its hawkish view over the monetary policy which, by the way, is not supported by the US President Donald Trump. The Fed might raise the interest rates in its December meeting as it fears higher inflation. However, the rise in the US government yields also impacts the Australian economy. How? Because it results in an increase in the funding costs with regard to the mortgages.
Is Everything Alright with Australian Economy?
As strong US dollar always acts as the major headwind for the currencies of the emerging markets, Australian dollar is no exception. A downward momentum was visible in the Australian dollar as it got weakened by approximately 1%. However, the Australian stock market witnessed a strong positive momentum when it opened and was being helped by the resource stocks as well as banking stocks. On October 4, 2018, Commonwealth Bank of Australia (ASX: CBA) ended the day witnessing a rise of 0.445% while Westpac Banking Corporation (ASX: WBC) recorded an intraday increase of 0.884%. The increase in the long-term bond yields positively impacts the banking stocks. Even Bank of Queensland (ASX: BOQ) witnessed a rise of 2.2% in price despite reporting a slip in cash profits for FY18. [optin-monster-shortcode id=”wxhmli4jjedneglg1trq”]
On October 4, 2018, S&P/ASX200 ended the day with the positive momentum at 6176.3 reflecting an increase of 30.2 points or 0.5%. Alumina Limited (ASX: AWC) and Magellan Financial Group Limited (ASX: MFG) ended the day with an increase of 10.753% and 7.818%, respectively. AWC was primarily lifted with rise in aluminum prices.
What Factors are Increasing Oil Prices?
The oil prices are witnessing a continuous uptrend thus, severely dampening the growth prospects of the emerging economies. The Indian economy is also witnessing the impacts as the currency witnessed a strong downtrend against dollar on fears of increasing current account deficit or CAD. The rise in the oil prices has been witnessed primarily on the back of OPEC’s decision to not to increase the production, Iran sanctions as well as decision of the US energy secretary of not advancing oil reserves to meet the supply gaps. A rise in the oil stock piles was witnessed when the data regarding the US Crude Inventory came out.
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