Will Government shut downs, Dow Jones reductions and rising US rates matter to the ASX

We hear a lot from the US, from Donald Trump and from the US federal reserve. How much is fact and how much is fiction? From what I read and understand, there is a little bit of the former and a little bit of the latter. There is no doubt that the maxim that when the US gets the sniffles, we catch a cold is correct in Australia. We are an "at risk" currency meaning that we normally need some sort of premium to attract overseas money. As the premium goes out of our yields, the overseas money returns home. Donald Trump has tried to jaw bone the US economy into recovery. It is true that the US Fed is raising interest rates and that the yields on US bonds are going up. It is also true that lower rated bonds are coming to fruition and are now competing with higher security bonds for existing investor money. The inevitable conclusion is that money will more from higher risk to lower risk for the same yield which will push the cost of money up for those who can least afford it.

The same goes for the banks in Australia. The cost of money is going up, interest only loans will have to revert to principle and interest pushing the total cost up for Australians in the near term.

Ultimately, the ASX is going to reflect this higher premium and puts pressure on boards to create value for shareholders above the "risk free" rate. The higher the risk, the higher the required return. We have seen the banks downgraded in the price to earnings ratio's on the basis of the Royal Commission, but also in relation to the likelihood of further earnings growth.

Miners walk to the beat of a different drum, with Asia and BRIC (Brazil, Russia, India and China) developing nations really driving commodity prices globally. Russia is however appearing to be playing out their traditional role as agitator to the West, and China has gone through a two decade spike of growth that appears to be slowing. As China pushes the boundaries of sovereignty and as Russia pushes the boundaries of sovereignty eyes turn to the US to play their role since second world war as global umpire. This is where the roads come together. Under the Trump administration, the US is unable to be relied upon, meaning others are gathering to take their place. Russia, China, Germany (through the EU) and Brexit all play their role in global uncertainty.

This directly plays into the Australian markets with our major trading partners and our major military partners being in direct conflict.

In short, we will require higher premiums to maintain price or price goes down. This will apply to the ASX and to Interest rates. Housing, which has been on a boom will plateau or continue to fall until average earnings multiples make sense against the house price in terms of the percentage of after tax earnings being applied to maintaining the family home. There may be some way to go yet.

All in all, 2019 is going to be a tough election year. Let's hope the petty politics can take a back seat and some real leadership and vision be brought to the fore to navigate what appear to be troubled waters.

#peace #UnitedNations #America