2019-12-16 13:06:511970-01-01 00:00:00

The Confusion of the RBA

On Monday (June 25th), Philip Lowe, the governor of the Reserve Bank of Australia commented on a panel in Canberra that he “doesn’t really understand” why the same investors who are betting on RBA’s cutting rates are also driving a massive rally in both stocks and bonds. “To me, it’s a strange world. There are investors who think the outlook is sufficiently weak that they expect central banks right around the world to cut interest rates but they are not worried about corporate profits or credit risk,” Lowe said. In fact, both of the traditional safe havens, such as gold, and riskier assets such as stocks and bonds, have hit record highs all around the world. 

The governor also highlighted the contradiction of the stock market being “very strong” and credit spreads being narrow while the central bank lowered the cash rate. Generally, a narrower credit spread indicates a vote of confidence in the economy. That is, investors are confident in corporate profits and the general company liquidity. 

On the other hand, Stephen Anthony, the Industry Super chief economist mentioned that there was ‘flashing red’ in the global bond market as it possesses a negative yield curve. Mr Anthony also added that although there was a rally in the equity market, he was staying on the bearish side due to the global bond market conditions.  Other analysts considered that investors are being forced into riskier asset classes, such as equities because “there is no alternative” amid the global economic downturn.

Economic Conditions in Australia

According to the NAB monthly business survey, business confidence has jumped whilst alternatively business conditions have deteriorated after the federal election in May. The retail sector showed a recession, as the retail turnover in April fell by 0.1% over the previous month. The unemployment rate in Australia remained stagnant at 5.2% in May, but the number of employed individuals increased by more than 42,300 as the participation rate hit an all-time high. Underemployment rose from 8.5% in April to 8.6% in May and the underutilisation rate was 13.7%. Gross domestic product growth in the first quarter of 2019 rose by 0.4% over the previous quarter but slowed to just 1.8% over the past 12 months. This is the weakest year-on-year economic growth in the past 10 years.

The cash rate currently sits at an all-time low of 1.25% after it was lowered in the last RBA meeting on June 5th. The Reserve Bank planned to cut interest rates “to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.” However, the Melbourne Institute and Westpac Bank Consumer Sentiment Index for Australia declined by 0.6% month-over-month to 100.7 in June 2019. This suggested that the RBA’s cash rate cut on June seemed to fail to support sentiment and perhaps even weaken it, although it may be too early to tell. 

The Global Economic Downturn 

According to Moody’s forecast, the global economic growth rate in 2019 will drop from 3.2% in 2018 to an expected 2.8%. Within this figure, the economic growth rate of G20 countries will peak at 3.3% in 2018 and will settle down to 2.9% in 2019. In particular, for developed economies in the G20, Moody’s believed that the growth rate will fall from 2.3% in 2018 to 1.9% in 2019. This trend has been reflected in the major G20 economies including the US and Germany. The overall growth rate in Emerging markets will be around 4.6% in 2019, down from 5% in 2018.

In order to withstand the downside risks of the slowing global economy, countries such as Russia, India and Chile have engaged in quantitative easing. At the beginning of the year, JPMorgan had expected the global average interest rate to reach 3% by the end of 2019 based on the data showing that the global average interest rate reached a high of 2.82% in February. However, the bank has reversed its view and downset the forecasted average interest rate to 2.5% in December this year, driven by the Fed’s interest rate cut. Moreover, the data from the Institute of International Finance showed that total global debt (including firms, households and governments) has approached $250 trillion so far. This is equivalent of approximately 317% of global GDP with an increase of about 70 trillion U.S. dollars experienced over the 2008 financial crisis. 

The escalating trade disputes and geopolitical risk in the Middle East will also increase financial market volatility and destabilise the global economic outlook.

By Steven Gao

Click here for a 7 days access to our Lotus Blue Portal.

KOSEC Terms & Conditions

Kodari Securities Pty Ltd (CAR 399556) trading as KOSEC is regulated by the Australian Securities and Investment Commission (ASIC). KOSEC is a financial services company and any information provided by its platforms, portals, reports and documents is protected by copyright. Any unauthorised production of this information is prohibited.
KOSEC reserves the right to change or remove any information provided on our website, reports or any documents including these terms and conditions at any time without notice. The change or modification to the terms and conditions will be effective immediately upon posting an updated version on our website, necessary platforms and documents. It is recommended that you review the information provided on our website, including these terms and conditions frequently for any changes.

KOSEC provides general advice only. The information provided is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. KOSEC recommends that you obtain your own independent professional advice before making any decision in relation to your particular requirements or circumstances. Please make sure you read our Financial Services Guide (FSG).

KOSEC does not guarantee any returns. Past performance of any product discussed is not indicative of future performance. (We urge that caution should be exercised in assessing past performance. All financial products are subject to market forces and unpredictable events that may adversely affect their future performance). Investing in the stock market can incur huge losses. Please also be aware that fees will incur on every transaction regardless of the performance of your investments or returns generated. Employees and or associates of KOSEC may hold one or more of the stocks, securities or investments reviewed by the company.

Your use of information from our website, reports, documents and from talking to our representatives/associates is at your risk. Under no circumstance should the investment be based solely on KOSEC information and general advice. You should seek professional financial planning advice.
KOSEC aims to maintain the accuracy of the data and information provided on this website, by using information prepared from a wide variety of sources, which KOSEC to the best of its knowledge and belief, considers accurate and does not make any representations or warranties of any kind, expressed or implied, about the completeness, accuracy, reliability, suitability or availability of the information provided.

We may at times refer to third parties, which the details of these third parties have been provided solely for you to obtain further information about other relevant products and entities in the market. KOSEC has no control over the information third parties have, or the products or services offered, and therefore make no representations regarding the accuracy or suitability of such information, products or services. You are advised to make your own enquiries in relation to third parties. Our inclusion of any third party content is not an endorsement of that content or the third party.

As a client you will be charged a yearly service fee and a set brokerage fee per transaction. Your service fee will automatically renew at the end of your agreed 12 month period at the same rate advertised at the time. Your credit card or bank account will be charged for a further year following which will again auto renew until you cancel your yearly service fee. You can cancel the auto renewal at any time in advance of the renewal date by contacting us. KOSEC is aware of the need to ensure the security of your credit card details and our payment systems are compliant with the Payment Card Industry (PCI) Data Security Standard.

You consent to receiving email correspondence from KOSEC, as well as companies KOSEC has an association with. These emails will be sent by KOSEC and third party companies. You can opt out of receiving any category of emails at any time by contacting us. We may from time to time inform you of special offers, or even ask your opinion of the services we provide, but your involvement is optional. Should you request us to do so, we will archive your details.

Indemnity and Liability
You indemnify KOSEC from all claims or threatened claims, suits, demands, damages, costs as well as including legal costs incurred in dealing with any threatened claim, expenses made by any person or corporation against KOSEC and any other amounts which is caused by KOSEC providing information, execution and General Advice.

You hold KOSEC harmless and release it from any liability in respect of any loss, harm or damage arising from a decision made by you on the basis of information obtained through the use of our portal, reports, documents or any General Advice given and any transaction taken place.

You hold KOSEC harmless and release it from any liability in respect of any loss, harm or damage arising from delays in executing orders for the client and acknowledges KOSEC makes no guarantees about the time taken to execute an order on behalf of the client. You acknowledge that KOSEC relies on third parties in providing technology and release KOSEC from any harm, loss or damage you may suffer as a result of the failure of such information technology.

Cookies and Links
KOSEC website, and its portal uses cookies, which lets us identify your browser while you are using the site or our portal. Cookies do not identify you personally. They simply allow us to track your usage patterns. If you prefer not to receive cookies, you can configure your browser to reject them or to notify you when they are being used. The functionality of the KOSEC website may be impacted if you restrict the use of cookies.

Fill up the form below and we will get back to you as soon as possible.



KOSEC’s CEO, Michael Kodari’s new book, “Stock Market Success” valued at $39.95, available at Dymocks book stores with all the proceeds going to Dymocks Children’s Charities.


Latest TV Commercial