• This has been fuelled by the failure of the US share market to break above September highs late the previous week, ongoing nervousness as the US September quarter earnings reporting season gets underway and the so called “fiscal cliff” looms closer, comments from the IMF that the risks to global growth were “alarmingly high” and renewed criticism that Europe’s crisis response is incomplete, ongoing uncertainty about Greece and Spain and nervousness regarding Chinese growth in the policy vacuum that seems to have arisen in the run up to the November 8 Congress that will officially settle the leadership transition.
• Share markets and risk assets generally have rallied since early June on the hope that policy action by the Fed, ECB, RBA, etc, would boost economic growth over the next 12 months. So far we are yet to see clear evidence that that hope is justified. I think it will be and there is nothing unusual in this as its how most market recoveries get underway, ie markets lead and the economics and then profits eventually follows. But obviously the risks are significant and we may still see a bit more short term uncertainty and volatility.
• The downwards revisions to the IMF’s global growth forecasts for 2012 (from 3.5% to 3.3%) and for 2013 (from 3.9% to 3.6%) aren’t really anything new as they just bring its forecasts more into line with market expectations. One can also wonder why the IMF suddenly sees the risks to global growth as “alarmingly high” when it didn’t earlier this year before the Fed announced QE3, the ECB announced its bond buying program and many central banks cut interest rates, including again Brazil and Korea over the last week.
• A big risk is that another bout of turmoil will be needed in Europe to finalise continued assistance for Greece, convince Spain to apply for assistance and to stop the backsliding about when to move to common supervision of banks (which is necessary before the ESM bailout fund can lend to banks directly).

Major global economic releases and implications

• US economic data was light on but consistent with ongoing constrained growth. The Fed’s Beige book continued to describe economic growth as modest, small business optimism slipped slightly in September, and export and import growth continued to slow but consumer confidence rose strongly and applications to purchase homes continued to rise. While unemployment claims fell sharply, this was largely attributed to just one state so may be distorted. The US earnings reporting season kicked off in earnest with Alcoa surprising on the upside but cutting its outlook for global aluminium demand. This overshadowed better news from Wal-Mart that indicated strong sales. 58% of companies to have reported so far have come in better than expected. A very high ratio of negative to positive profit warnings suggests scope for better than expected results, but outlook statements are at risk of being negative with the impending “fiscal cliff” likely to figure highly and this may weigh on unrealistically high expectations for 13% profit growth in the current quarter.
• European industrial production for August surprisingly rose for the second month in a row on strong gains in France and Italy. It’s hard to see this being sustained though given soft recent PMI readings.
• Chinese data for September was mixed. New bank loans were a bit less than expected but total financing rose and growth in exports and imports improved significantly. In fact the better than expected upswing in Chinese exports follows similar outcomes for Taiwan and Korea and may be consistent with a bottoming in global manufacturing PMI’s in suggesting a possible stabilisation or improvement in global growth.
• Japan remains soft with falls in confidence & machinery orders adding to the risk of a return to recession.

Australian economic releases and implications

• Australian economic data was generally soft, with a fall in job advertisements pointing to a soft labour market ahead, continued sub-par readings for business confidence and conditions according to the September NAB  business survey with a renewed deterioration in new orders being particularly worrying and consumer confidence up just 1% in October, despite the resumption of interest rate cuts, and the level of consumer confidence remaining below where it was after the November rate cut last year. While employment rose by a reported 14,500 jobs in September, the overall picture painted by the September labour force report is one of softness. Annual employment growth is just 0.5%, annual growth in hours worked is just 0.3%, 12,000 jobs have been lost over the last four months, trend employment growth has turned negative and unemployment looks to be trending higher after a falling participation rate kept a lid on it over the past year or so. Moreover, a speech by RBA Deputy Governor Lowe highlighted the RBA is now looking beyond the low unemployment rate and paying more attention to the softness in jobs growth, weak hours worked and the fall in the participation rate.
• All of this is consistent with more interest rate cuts ahead, with the RBA on track to cut by another 0.25% on
  Melbourne Cup day.

Major market moves

• Global share markets resumed their correction over the past week not helped by IMF warnings about global growth, and ongoing worries about US earnings, Spain, Greece and China. US shares fell 2.2% and European shares fell 2.5%. However, Australian shares managed to hold up reasonably well, falling just 0.2% over the past week, helped by the RBA’s interest rate cut of the previous week and hopes of more to come along with a further recovery in the iron ore price.
• Commodity prices were mixed with the oil price up slightly, iron ore prices up and gold and metal prices down.
• Currencies were little changed, but the $A bounced back a bit after the previous week’s fall and is continuing to be remarkably resilient despite the RBA’s rate cuts and worries about China.

What to watch over the week ahead?

• In the week ahead a key focus will be on the Euro-zone leaders’ summit on Thursday and Friday which will hopefully make some progress regarding: the next tranche of payments to Greece; when common banking supervision will commence; and maybe whether and when Spain will apply for assistance. Data for Euro-zone inflation will also be released on Tuesday.
• Chinese economic data for September will also be watched closely. Expect a fall back in inflation (Monday) to around 1.8% reflecting a fall in food prices, a further fall in September quarter GDP growth (Thursday) to around 7.2% (from 7.6% in the June quarter) and possible signs of stabilisation in industrial production (also due Thursday). Retail sales growth is expected to come in around 13% and growth in fixed asset investment is likely to come in just over 20%.
• In the US, expect modest growth in September retail sales (Monday), a slight improvement in manufacturing conditions according to the New York and Philadelphia Fed surveys (due Monday and Thursday respectively), benign inflation readings for September (Tuesday), a bounce in industrial production (Tuesday) and continued strength in homebuilder conditions (also Tuesday), housing starts (Wednesday) and existing home sales (Friday).
• The third quarter profit reporting season will pick up steam with over 100 major companies reporting.
• In Australia, the minutes from the RBA’s last Board meeting (due Tuesday) are expected to confirm the RBA retains a bias to ease rates further in order to boost other sources of demand as the mining boom slows next year. A speech by RBA Assistant Governor Edey will also be watched for any clues on interest rates. Expect a 1% gain in August housing finance (Monday).

Outlook for markets

• Global shares have been undergoing a correction after strong gains since early June. Given uncertainties regarding Spain, Greece, the US Election and the rapidly approaching “fiscal cliff” and China this may have a bit further to run. However, the broad rising trend is likely to remain intact. A pick up in global growth going into next year on the back of easing by the Fed, the ECB’s bond buying program and more decisive stimulus action in China once its leadership transition is resolved should support profit growth in 2013. Australian shares are being given an added impetus by the resumption of RBA interest rate cuts. With shares remaining cheap, particularly against government and corporate bonds, we see further gains into year end. If there is a set back in the weeks ahead it should be seen as a good buying opportunity.
• While sovereign bonds in safe countries are a good diversifier, bond yields in major countries remain very low and point to low medium term bond returns. Corporate debt is a better proposition for those after income but not willing to accept the volatility that comes with shares.
• The short term outlook for the $A is messy. US QE3, foreign central bank buying and prospects for improved
  global growth and higher commodity prices into next year are positive. But against this, uncertainties regarding China and ongoing RBA rate cuts are negatives. The likely outcome is for a volatile range of between $US0.95 to $US1.10, with the risk on the downside. We have probably seen the best for the $A.

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