THE gains in “bond proxy” yield stocks appears to have run its course, as the US Federal Reserve begins to talk up interest rate rises. Many of the risks previously discussed – bad debts in Italian and Chinese banks, the US presidential race, South China Sea tensions – all remain.
Rising bond yields and the growing certainty of a December rate rise by the US Fed continue to dominate the market. If the Reserve Bank of Australia is going to cut interest rates again before 2017, it will likely be only because the upcoming third quarter CPI data (due out on October 26) springs a significant downside surprise relative to the RBA’s own inflation forecast. On currency markets, the British Pound continues to remain under pressure with further large declines as it appears that the UK is heading for a “hard” Brexit. Over two months have now passed since the Australian Dollar has spent more than a moment outside of the US$0.7450 – $0.7750 range.
A range break-out in the Australian Dollar, when it comes as it surely will, still looks like it will have to emanate from the US Dollar side of the equation. With the latest US payrolls report failing to provide an immediate catalyst, it is hard to escape the view that it probably won't come until after the US election. Here, whether because a Clinton victory is seen to clear the decks for a Fed move in December, or a Trump victory engenders at least a short term significant ‘risk off’ move. With Donald Trump’s recent drop in the polls, attention is increasingly focused on control of Congress. Recent polling suggests a strong chance Democrats may at least gain control of the Senate. Speaker Paul Ryan reportedly told top donors there is some concern the Republican party may lose control of the House also.