Strategy & Stocks

After the so-called “taper tantrum” of May 2013 there was a “tightening tantrum” on Wall Street this week in response to more surprisingly strong US employment data, further confirmation the US economic recovery is self-sustaining. The US Federal Reserve will eventually lift the Fed Funds Rate for the first time since 2006, as the economy no longer needs extreme monetary stimulus. Market participants are nervous because everyone knows extremely stimulatory monetary policy drove US equities to record highs. But the tightening will be gradual and could come later given historic US$ strength.

The volatility this week is to be expected as markets adjust to the approaching historic change in monetary policy by the Fed. The prospect of gradual US monetary tightening makes the outlook for popular Australian yield trades like the banks and Telstra murkier. The post-GFC era of falling bond yields globally is over.

The RBA will cut again but it can’t do anything about the main drag on business confidence: disillusionment with the Canberra political process. The most likely scenario is for continued slow recovery in confidence, consumption and investment but a significant risk is another tight, chaotic budget in May, which would further reduce public demand and erode confidence.

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Strategy & Stocks

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