Weekly market & economic update 24 December 2010

From

Headline developments of the past week

  • The past week was pretty light on in terms of major news. However, while European debt worries continued amid talk of more ratings downgrades, demand for riskier assets was in part given a boost by speculation that China is investing in European debt after Chinese Vice Premier Wang Qishan said the country had taken “concrete action” to help the European Union with its debt problems.
  • The combination of reasonable economic data, Chinese comments about European debt and good corporate news saw share markets rise with the US share market rising above the level it was at before Lehman Brothers went bust in September 2008.

Major global economic releases and implications

  • US economic data was consistent with a pick up in the pace of growth. Sales of existing and new homes rose in November and house prices unexpectedly increased adding to confidence that the housing sector may have found a base despite mortgage applications falling slightly over the last week. What’s more durable goods orders excluding volatile transport orders rose strongly indicating that business investment is improving, personal spending was strong in November with weekly retail sales data rising solidly over the last week and weekly unemployment claims continue to fall.
  • Japanese export growth accelerated for the first time in nine months as a rebound in global demand helped the nation’s economy withstand the stronger Yen. A leading index of growth rose marginally but there were no surprises from the Bank of Japan which left its key policy interest rate near zero and made no further changes to its quantitative easing program.

Australian economic releases and implications

  • In a quiet week for data releases in Australia, the minutes from the Reserve Bank’s December Board meeting confirmed that the Bank was happy with the current level of interest rates. While it still sees the high terms of trade boosting investment and eventually inflation it also sees monetary policy as now being mildly restrictive. And with restraint in household consumption and borrowing making room for investment to rise, the clear impression remains that interest rates are likely to remain on hold for several months at least.

Major market moves

  • Share markets generally rose over the last week boosted by solid economic data, M&A activity and good corporate news. Chinese shares were the exception where concern remains about tightening to keep inflation and property prices under control.
  • Commodity prices also pushed higher on increased confidence regarding global growth with the copper price surpassing its 2008 peak and the oil price rising above $US90 a barrel as US crude stockpiles fell to their lowest level since February.
  • The strength in commodity prices also pushed the Australian dollar back above parity against the US dollar.
  • Government bond yields rose in the US and Australia.

What to watch in the next two weeks ahead?

  • In the US, data for consumer confidence (due December 28th) is likely to show a modest rise, but the key focus will be during the first week of January when the ISM manufacturing conditions index (due January 3rd) is likely to remain solid and non farm payroll data (due January 7th) is likely to show a solid gain of 150,000 jobs. Data for house prices, pending home sales and the ISM non-manufacturing index are also due for release over the next two weeks.  Key Japanese labour market, retail sales, industrial production and inflation data is also due for release on December 28th.  
  • It will be a light two weeks on the data front in Australia with private sector credit data (due December 31) likely to remain soft and building approvals (due January 6) likely to fall slightly after a 9.3% rise in October.

Outlook for markets

  • The period over Christmas/New Year is normally positive for shares reflecting New Year optimism, the absence of new capital raisings and the investment of year end bonuses. Over the last 15 years, the period from mid December to early January has seen the US share market rise 11 times and the Australian share market 14 times.
  • While GFC aftershocks will continue to cause volatility and shares are becoming vulnerable to a short term correction in January after several months of very strong gains, shares are likely to put in good gains through 2011 as a whole.  Shares are cheap, the run of better than expected global economic data is continuing suggesting that the global economic recovery remains on track which should in turn drive another year of solid profit growth, the global liquidity backdrop is highly favourable underpinned by very low interest rates in key countries and quantitative easing in the US and the corporate sector is cashed up which is likely to result in a further pickup in merger and acquisition activity, share buybacks and dividends. By end 2011 we see the Australian ASX 200 index rising to 5500.
  • Notwithstanding inevitable volatility, the $A is likely to head higher as the $US and the euro remain under downwards pressure, interest rates in Australia remain relatively high and high commodity prices keep the terms of trade near early 1950s highs. By end 2011 the $A is likely to have reached $US1.10.
  • While low inflation, central bank government bond purchases and the absence of any near term monetary tightening should help keep bond yields in key advanced countries reasonably low in the short term, the risk of a sharp back up in global bond yields at some point is very high. Bond yields in key advanced countries are still well below longer term sustainable levels and sooner or later the record inflows into bond funds seen in recent years are at risk of becoming record outflows. The back up in bond yields over the last few weeks may be a warning sign of things to come. Fortunately bond yields in Australia are more in line with long term sustainable levels so the risk of back up in yields and sharp capital losses for investors in Australian bonds is less.
Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591) (AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

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