After a few days of relative calm on the European front it was back to mayhem as normal over the last week with the Greek PM announcing a referendum on the latest EU bailout package, causing a bout of panic as investors fretted it could lead to Greece going through a disorderly default and even leaving the euro, and then announcing it was off.
While the Greek PM won a parliamentary confidence vote, Greece is seeking to form a new unity government in order to pass the terms of the new debt restructuring plan, probably ahead of fresh elections early next year. This still leaves much uncertainty about the outlook for Greece. Even if the Greek parliament passes the terms of the latest debt restructuring plan, the economic pressure on the country is likely to remain intense. Its economy will probably shrink 10% next year having already shrunk by about 12% from its 2008 high, unemployment is 17% on it‘s way to beyond 20% and youth unemployment is already 43%. Against this backdrop social unrest is only likely to intensify as austerity continues to bite. Defaulting and leaving the euro might still seem tempting to many. Italy is starting to look increasingly messy too and this was partly refelected in its bond yields rising to a new euro era high.
Unfortunately the G20 leaders meeting was a bit of a failure with no firm commitment of international funds to help Europe until the EU comes up with more details on its rescue plan, which may not be until February according to according to President Sarkozy. Commitments on exchange rate flexibility, in reference to China, were nothing more than the usual motherhood statements, albeit a little bit stronger – it’s hard to see a stronger Renminbi leading to a better global economic outlook.
On a positive note though the ECB cut interest rates and looks likely to do more, US economic data including that for payroll employment remains consistent with modest growth and Chinese data remains consistent with a soft landing. A global monetary easing cycle is now clearly underway with 22 central banks easing over the last two months. This is a positive force for risky assets, helping to provide some offset to the European soap opera.
In Australia, the Reserve Bank cut interest rates by 0.25% to 4.50%. The RBA’s Quarterly Statement on Monetary Policy backed up the move to cut rates by revising down both growth and inflation forecasts. While the outlook painted by the RBA for trend growth and inflation at the middle of the target range doesn’t’ suggest any urgency to cut rates again, the RBA’s acknowledgment that the risks are skewed to the downside and its expectation that the terms of trade has peaked and unemployment will rise all suggest that it’s bias is towards more interest rate cuts.
Given the uncertain global backdrop and the flow on to domestic confidence, one rate cut alone is unlikely to be enough to inspire a sustained pickup in the housing and retail sectors. Barring a blow up in Europe, the RBA is likely to sit on its hands in December but my inclination is to see more rate cuts on the way with the February meeting being the next one to watch closely.
In the US in the week ahead, small business optimism (due Tuesday) and consumer sentiment (Friday) are likely to remain soft and the trade balance (due Thursday) is likely to deteriorate slightly.
Chinese October data due Wednesday is expected to confirm that growth and inflation are continuing to cool. We expect inflation to slow to 5.4% (from 6.1% in September) helped by falling food price inflation and indicators for retail sales, industrial production, fixed asset investment, exports and money supply growth to all show a further modest loss of momentum. Falling inflation and moderating growth all point to policy easing.
In Australia, consumer confidence (Wednesday) is likely to improve slightly on the back of the RBA’s rate cut but the labour market is likely to have remained soft with subdued ANZ job ads (Monday) and only modest growth in October employment and unchanged unemployment (Thursday). The NAB business survey will also be released on Tuesday and housing finance data is due Wednesday. A speech by RBA Assistant Governor Lowe on Thursday will likely be watched closely for clues on interest rates.
Worries about Europe and the lack of decisive action from the G20 saw US and European shares fall on Friday. Futures trading on Friday night points to a 27 point, or 0.6%, fall in the Australian share market when it opens on Monday. However, much will depend on how Greece progresses in forming a new unity government over the remainder of the weekend.
Outlook for markets
While the latest European debt rescue plan announced a weak ago should have helped Europe buy a bit of time to get its house in order, the political mess in Greece and Italy has confused the short term outlook for share markets again. Long term value is good for shares, the US and China are looking okay, global monetary easing is positive, we are entering a seasonally stronger period of the year for shares and investors
generally are short shares, but the event risk and slide into recession in Europe are likely to keep the ride volatile in the short term.
The $A, like all risky assets, is likely to remain vulnerable in the short term to the ongoing European debt debacle. However, the medium-term trend is likely to remain up as the $US remains under long-term downward pressure, not helped by its debt woes and the prospect of more quantitative easing, Chinese commodity demand remains strong over the long-term and Australian interest rates will remain well above US
rates even if the RBA cuts rates by more.
Government bonds in major global countries are a good diversifier. However, yields are extremely low so expect modest medium-term returns.
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AMP Capital: Weekly economic & market report
After a few days of relative calm on the European front it was back to mayhem as normal over the last week with the Greek PM announcing a referendum on the latest EU bailout package, causing a bout of panic as investors fretted it could lead to Greece going through a disorderly default and even leaving the euro, and then announcing it was off.
While the Greek PM won a parliamentary confidence vote, Greece is seeking to form a new unity government in order to pass the terms of the new debt restructuring plan, probably ahead of fresh elections early next year. This still leaves much uncertainty about the outlook for Greece. Even if the Greek parliament passes the terms of the latest debt restructuring plan, the economic pressure on the country is likely to remain intense. Its economy will probably shrink 10% next year having already shrunk by about 12% from its 2008 high, unemployment is 17% on it‘s way to beyond 20% and youth unemployment is already 43%. Against this backdrop social unrest is only likely to intensify as austerity continues to bite. Defaulting and leaving the euro might still seem tempting to many. Italy is starting to look increasingly messy too and this was partly refelected in its bond yields rising to a new euro era high.
Unfortunately the G20 leaders meeting was a bit of a failure with no firm commitment of international funds to help Europe until the EU comes up with more details on its rescue plan, which may not be until February according to according to President Sarkozy. Commitments on exchange rate flexibility, in reference to China, were nothing more than the usual motherhood statements, albeit a little bit stronger – it’s hard to see a stronger Renminbi leading to a better global economic outlook.
On a positive note though the ECB cut interest rates and looks likely to do more, US economic data including that for payroll employment remains consistent with modest growth and Chinese data remains consistent with a soft landing. A global monetary easing cycle is now clearly underway with 22 central banks easing over the last two months. This is a positive force for risky assets, helping to provide some offset to the European soap opera.
In Australia, the Reserve Bank cut interest rates by 0.25% to 4.50%. The RBA’s Quarterly Statement on Monetary Policy backed up the move to cut rates by revising down both growth and inflation forecasts. While the outlook painted by the RBA for trend growth and inflation at the middle of the target range doesn’t’ suggest any urgency to cut rates again, the RBA’s acknowledgment that the risks are skewed to the downside and its expectation that the terms of trade has peaked and unemployment will rise all suggest that it’s bias is towards more interest rate cuts.
Given the uncertain global backdrop and the flow on to domestic confidence, one rate cut alone is unlikely to be enough to inspire a sustained pickup in the housing and retail sectors. Barring a blow up in Europe, the RBA is likely to sit on its hands in December but my inclination is to see more rate cuts on the way with the February meeting being the next one to watch closely.
In the US in the week ahead, small business optimism (due Tuesday) and consumer sentiment (Friday) are likely to remain soft and the trade balance (due Thursday) is likely to deteriorate slightly.
Chinese October data due Wednesday is expected to confirm that growth and inflation are continuing to cool. We expect inflation to slow to 5.4% (from 6.1% in September) helped by falling food price inflation and indicators for retail sales, industrial production, fixed asset investment, exports and money supply growth to all show a further modest loss of momentum. Falling inflation and moderating growth all point to policy easing.
In Australia, consumer confidence (Wednesday) is likely to improve slightly on the back of the RBA’s rate cut but the labour market is likely to have remained soft with subdued ANZ job ads (Monday) and only modest growth in October employment and unchanged unemployment (Thursday). The NAB business survey will also be released on Tuesday and housing finance data is due Wednesday. A speech by RBA Assistant Governor Lowe on Thursday will likely be watched closely for clues on interest rates.
Worries about Europe and the lack of decisive action from the G20 saw US and European shares fall on Friday. Futures trading on Friday night points to a 27 point, or 0.6%, fall in the Australian share market when it opens on Monday. However, much will depend on how Greece progresses in forming a new unity government over the remainder of the weekend.
Outlook for markets
While the latest European debt rescue plan announced a weak ago should have helped Europe buy a bit of time to get its house in order, the political mess in Greece and Italy has confused the short term outlook for share markets again. Long term value is good for shares, the US and China are looking okay, global monetary easing is positive, we are entering a seasonally stronger period of the year for shares and investors
generally are short shares, but the event risk and slide into recession in Europe are likely to keep the ride volatile in the short term.
The $A, like all risky assets, is likely to remain vulnerable in the short term to the ongoing European debt debacle. However, the medium-term trend is likely to remain up as the $US remains under long-term downward pressure, not helped by its debt woes and the prospect of more quantitative easing, Chinese commodity demand remains strong over the long-term and Australian interest rates will remain well above US
rates even if the RBA cuts rates by more.
Government bonds in major global countries are a good diversifier. However, yields are extremely low so expect modest medium-term returns.
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