August was the worst month for global financial markets in several years as sentiment was hit by a conjunction of factors which the markets collectively interpreted as a global deflationary shock. The events included the re-emergence of a decline in the price of oil and other commodities, a surprise currency move coupled with soft economic statistics from China and, finally the ongoing nervousness about when the Federal Reserve will lift interest rates in the USA.
The latter is not new news. What this means is the USA is strengthening, China is weakening and commodities are falling. In the scheme of things there is no economic reason for global market falls but nervousness and irrationality
drives short term behaviour. Portfolios in professional hands are no doubt seeking better value today. Overall equity markets have fallen across the board, especially among the emerging markets, and volatility has spiked sharply higher. The extreme volatility and dramatic reactions to economic news suggest the markets are pricing more off fear than off fundamentals. Economic data from the US released in August confirmed ongoing modest economic recovery with low inflation.
The Australian economy recorded modestly positive real GDP growth in the second quarter driven by consumer spending. The Reserve Bank left the cash rate unchanged at 2% at its Board Meeting on 2 September.