Money How plummeting Wall St stocks could impact your wallet

14:46  06 february  2018
14:46  06 february  2018 Source:   MSN

Australia shares end higher, led by financials and materials; New Zealand slips

  Australia shares end higher, led by financials and materials; New Zealand slips Australian shares rose on Thursday, underpinned by strong gains in mining stocks and financials, with sentiment boosted by news of robust expansion in Australian manufacturing last month. The S&P/ASX 200 index (.AXJO) climbed 0.9 percent or 52.4 points to 6,090.1, its highest close since Jan. 10. The benchmark added 0.3 percent on Wednesday.Australian manufacturing posted solid expansion last month with demand, both domestic and offshore, strong enough to allow firms to raise prices to protect profit margins, a survey showed on Thursday."Overall, commodities are positive, U.S.

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The collapse in the US stockmarket can be interpreted in two quite distinct ways. It is either the beginning of the Donald Trump inspired US economic miracle - or it's the correction, the easing of the exuberance that Wall Street had to have.

Either way, it causes intense nervousness among investors and governments around the world.

The trigger for the falls in the US stockmarket is a seemingly innocuous 0.2 percent. That was a rise above consensus forecasts for US wages growth, reported on Friday. The market expected 2.7 percent, the result was 2.9 percent.

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But that 0.2 percent difference was enough to set off a 650 point fall (2.5 percent) in the Dow Jones on Friday, and another 1,175 fall (4.6 percent) overnight (Monday US time).

It was the biggest one-day fall for the market in almost seven years. Almost $490 billion wiped off the value of US equities in just two days.

So why was that 0.2 percent so important? Because if the US's strong economic growth - creating more jobs - is putting pressure on wages; then inflation is likely to rise and with it interest rates. If interest rates start to rise, then banks and financial stocks come under pressure, hence the sell-off.

The rise and fall of the US stockmarket has a direct impact on the livelihoods of all Australians, and it's tethered to wage growth. © AAP Image/Dan Peled The rise and fall of the US stockmarket has a direct impact on the livelihoods of all Australians, and it's tethered to wage growth. The US economic cycle is more advanced than Australia's, spurred on by Trump's corporate tax cuts and other pro-growth policies that - in Australia - remain stuck in the Senate incapable of becoming law.

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Only weeks ago in the US, Trump tweeted that black unemployment was the "lowest ever recorded in our country". And that is something to boast about. Nothing alleviates poverty more quickly than a working population.

But remember an extreme example of labor shortages. In Australia during the mining boom, when cooks and painters were paid more than $150,000 a year to work in mining areas, and when the concept of fly-in-fly-out workers became a thing.

It might not be that extreme in Australia, but if labor capacity is taken up, then wage rises follow. But if interest rates have to rise to head off inflation (long term, inflation has historically been a bad thing for job creation) then other questions have to be answered.

Questions like: what about the trillions of dollars of debt the US had to take on to recover from the Global Financial Crisis? What about the spiralling cost of doing business in the US? Or the inverse relationship between rising interest rates and falling bond prices.

The ASX takes off

  The ASX takes off Australian stocks surged in early trade, climbing back up after the global slump. Australian stocks surged in early trade, climbing back up after the global slump.

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In Australia, wages have not yet started to grow. But with around 400,000 new jobs created in 2017 and with job advertisements sharply higher in January, the signs are there.

The unemployment rate is now down at 5.4 percent ... and anything under 5 percent is considered close to full employment. And that's when the wage rises in Australia are expected to follow.

If that happens, the Reserve Bank will not be far away, lifting interest rates. Money markets right now indicate the first rise in rates will be February next year, but if wages show signs of rising sooner, then it could be earlier than that.

Economists right now are divided about the strength of Australia's economy and when those rate rises will arrive.

One group points to the cooling in house prices and construction, and say this will be enough to slow job creation this year; leading to low wages growth, low inflation and no interest rate rises this year.

The other group says the housing cycle might slow, but it will not go away because of Australia's rising population. They say wages growth will continue as more jobs are created and, so long as the US economy does not fall off a cliff, commodity prices and Australia's economic growth will also pick up.

Either way, you have to keep watching this economic debate - for your job, mortgage rate, business and superannuation fund depends upon it.

Global markets move higher, shrugging off stronger-than-expected US inflation report .
Global markets moved higher overnight, shrugging off a stronger-than-expected inflation report out of the United States. European stocks initially dipped into negative territory on the news the US consumer price index rose by 0.5 per cent last month, ahead of forecasts.

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