Equity markets returned to all-time highs in September powered by a larger than expected cut in interest rates by the US Federal Reserve and a massive stimulus package from China to get their economy back on track.

US Federal Reserve started the descent with a bang

On September 18, the US Federal Reserve reduced the Federal Funds rate by 0.5% down to a range of 4.75 – 5.0%. This cut was larger than many had anticipated but in line with what many had hoped for. This was clearly a move to protect the economy from falling into recession. Underlying economic indicators are clearly weakening (Manufacturing Confidence and Unemployment data) though headline inflation remains above target at 3.0%.

The equity market reacted positively to the news taking the view that lower interest rates will help company earnings and avert the chances of a recession (consumers will feel richer and spend more). Though the fixed interest market fell as bond investors started to fret that such a large move could stoke inflation requiring interest rates to stay higher for longer.

Only time will tell who is right, the US Federal Reserve is trying to thread a very fine line between not putting the economy through too much pain and ensuring that inflation is well and truly vanquished before easing financial conditions.

China has finally had enough

The Chinese leadership group have finally decided enough is enough and appear to be bringing out all guns to fix the economy. In a coordinated move, a number of announcements were made to protect both the stock and property markets:

• The amount of capital banks are required to hold against loans was reduced, enabling them to increase lending
• Interest rates were reduced by 0.5%
• Support measures were put in place to help SME’s purchase affordable homes; and
• A US$113billion stock market stabilisation fund was announced to provide additional liquidity and support for the stock market

As expected, this response was seen very positively by markets, the Chinese Stock Market was up 24% in the month, though around the world companies with exposures to China also benefited. In Europe the luxury good companies (eg LVMH, Hermes and Burberry) all saw double digit gains and here in New Zealand the likes of A2 milk saw strong gains given the hope that the Chinese consumer will start spending again.

The winter of discontent continues here in New Zealand

Back here in New Zealand, economic metrics see no sign of getting better. Confidence and business sentiment metrics are improving, but we see continued increases in emigration out of New Zealand and business liquidations have reached all-time highs.

In hindsight this should have been expected given what is happening in the New Zealand economy, over the past 6 months we have seen:

• The housing and construction market collapse
• Most Government projects have stopped
• Significant job cuts in the public sector
• Immigration has come to a standstill

At a simplistic high level, these have been four of the major drivers of the New Zealand economy over the past 10 – 20 years.

Recognising the worsening state of the economy, economists are now hoping the RBNZ follows the US Federal Reserve path and moves forward with a 0.5% interest rate cut on October 9th.

Given the relative weakness of the NZ economy versus the US economy it is hard to understand why we have higher interest rates. New Zealand OCR currently at 5.25% vs the Fed Funds rate currently sitting at 4.75 – 5.0%. A brave Adrian Orr may even decide to go as far as announce a 0.75% cut to get the economy going.

BlackRock goes all in on Bitcoin

Bitcoin released a seminal paper talking about the benefits of Bitcoin. The potential benefits outlined in the article include:

• It is a unique asset that is not correlated to traditional financial markets
• It could provide a hedge to geopolitical uncertainty and instability, potentially playing a similar role to gold
• It is a scarce asset with limited supply which may make it an attractive hedge against inflation

This report combined with Larry Finks (the BlackRock CEO) comments that he was wrong on Bitcoin and now sees it as a legitimate and long term financial asset shows how far into the mainstream Bitcoin has come. It is no longer a fringe asset and is becoming a mainstream asset. Early bitcoin believers are likely to be aghast at this change.

Koura Wealth Limited (Koura) is the issuer and manager of the Koura KiwiSaver Scheme. This document has been prepared by Koura based on information believed to be accurate and reliable, but no guarantees or warranties, whether expressed or implied, are made regarding its accuracy or completeness.For more information about the Scheme, please refer to the Product Disclosure Statement or the latest Quarterly Fund Update both of which are available at www.kourawealth.co.nz/documents.