Caution, in general, has turned out to be a safe option for most investors. The US equity market decline that happened in August and the volatility in the market at present (mainly because of concerns related to China and the emerging markets) has made caution all the more important. The continued concerns about very low US inflation rates just adds to this.
The September meeting of the US Federal Open Market Committee made a lot of things clear for the common man. Chair Janet Yellen and the Committee kept interest rates on hold.
At this point, it might be important to back up and look at where it all started from.
Here is what happened back in 1994: when the Fed surprised markets with a rate hike that didn’t seem to be based on available data, it sent bonds and equities tumbling. Most people at that time agreed that a rate increase dependant on economic data seemed to be a good thing.
Now, for a country such as Australia, which is a commodity exporting country, the main problem arose when the Fed suggested that recent global economic and financial developments may restrain economic activity. This included the slowdown in many emerging economies such as China and Brazil, and related currency and share market turbulence. If interest rates are held at zero so long after the US economic recovery, it seem like an instance of non-action.
The biggest help to drive down the inflation while also nailing down energy producers around the world is the easy availability of cheap oil. Recently, the vehicle sales in the US in August have been the strongest since 2005. Along with this data, the unemployment rate has fallen down from 10% as recorded during the Great Recession crisis to 5.1% today.
Now, we must also talk about the potential effect on the Australian Dollar due to the US rates. Based on what we know now, by the middle of the year the Australian Dollar would be less impacted by how the US market functions. This is definitely good news for investors.
And there is more good news. The Fed now expects the US economy to be relatively stronger than what it was before. This also means that we can expect the Fed to raise the interest rates this year. For that to happen, they just need to keep their eye on recent market explosions in the financial sector and be absolutely sure that the economy is, indeed, going strong.
Globally, however, continental Europe is seen as having better opportunities for investors. The European Central Bank is aggressively purchasing assets and looking into records to understand how it was done by the Fed several years back. But more on that later.
All of know that when it comes to global economies a lot of shifts in trends take place. That is all the more reason why it makes sense to stay on the safe side of things. And given that caution is the rule of the game, investors should really consult their financial advisers and understand the science of investment as per the movement of the markets for better returns.
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