Interest rates, exchange rates and iron ore prices have seen the market go lower over the past couple of weeks.
First let’s look at interest rates. The Reserve Bank left them on hold this month after widespread expectations of a rate cut. The expectation is that another rate cut is on the cards.
Markets pulled back on this news. There seem to be a belief that a rate cut will stimulate spending. The current focus for Australians is on jobs and saving money, not spending.
The rate is already at 2.15% with lending rates as low as 3.99%. Another cut will not be the solution, just ask Japan.
Exchange rates and Iron ore prices are having an effect on the profitability of the mining sector. Regardless of the position of climate alarmists, this sector has provided Australia with most of our wealth over the past decades.
It will also be the industry, which saves Australia in this current slowdown. Volumes are still being sold, but profits, and therefore taxes are down which is causing the government to go on and on about deficits.
End of the day, the condition of our economy is such that deficits will be ongoing for some time. Keep in mind that it is not the government’s role to make a profit as they are a not for profit organization.
At present, there is a good opportunity for the long-term investor in the materials and energy sectors.