The past week has seen the recovery in risk assets continue with shares pushing higher, bond yields backing up, credit spreads narrowing, oil and commodities rebounding and even the $A pushing back over $US0.73. From their recent lows US and global shares are up 9%, Australian shares are up 7%, oil is up 32%, the $A is up 7% and iron ore is up 34%. Maybe these rallies are telling us that all the handwringing over global growth was overdone.

So what’s helping drive the rebound in shares and other risk assets? It’s a whole bunch of things.

First, while global growth looks to have slowed a bit it’s not crashing. This is most evident in the US where economic data suggests no sign of the recession that share markets seemed to be moving to factor in earlier this year.

Second, central banks are continuing to help sooth market fears. In the past week, New York Fed President Dudley was dovish on interest rates – indicating concern about inflation expectations, caution on US data and an awareness of the impact of global developments – adding to confidence that the Fed won’t be hiking rates at its March meeting. And the People’s Bank of China relaxed monetary policy again by cutting banks’ required reserve ratios.

Thirdly, policy uncertainty in China appears to have settled down, helped in particular by relative stability in the value of the Renminbi (after its depreciation earlier this year was a major factor in unnerving investors).

Finally, here in Australia, economic growth surprised on the upside helping allay fears about local banks and the housing market.

Of course, it’s still too early to now expect smooth sailing (to the extent financial markets are ever smooth anyway) as fears around the Fed and global growth are likely to continue to periodically test the bulls and give us volatility. But at least things look a lot less bleak than they did in the dim dark days of the northern hemisphere winter.

There was one development over the past week that was a bit concerning – the rise and rise of Donald Trump. Post the Super Tuesday primary votes it’s more and more like it will be a Clinton versus Trump contest in the final vote later this year. Trump is still only getting 30-40% of the Republican primary vote, but the failure of the “not-Trump” Republican vote to clearly settle on one candidate is working in his favour. It needs to soon and the Republican establishment does now seem to be starting to fight back, which may yet help end Trump’s rise.

A Clinton presidency would probably mean more of the same, particularly with a Republican congress likely to help keep policy rational. (Or maybe I have fond memories of the Bill Clinton presidency years). What is less clear is how a Trump presidency would pan out. What precisely Trump stands for is a bit hard to work out. He is committed to building a wall on the Mexican border (because “They’re bringing drugs. They’re bringing crime. They’re rapists.”) and looks to be a glued on protectionist (watch his 1988 interview with Oprah), wants to crack down more on banks and he has crazy foreign policies and plans to deal with terrorists (“take out their families”). But apart from those things and lots of whacky outbursts, it’s hard to know precisely what his policies as president would be. Hopefully Congress would keep him on a sensible path if he were to gain the presidency. Or that may be just wishful thinking. But before it even gets to that one must hope that common sense will prevail amongst the median American voter.

Major global economic events and implications

US economic news was good with a gain in the manufacturing conditions ISM for February of 1.3 points to 49.5 with new orders remaining solid, the non-manufacturing ISM remaining solid, construction spending gaining more than expected in January and jobs data mostly looking good.

Eurozone retail sales for January rose by more than expected in January, unemployment continues to trend down (albeit it remains very high at 10.3%) and final business conditions PMIs for February were revised up a bit suggesting that economic conditions may have improved as the month progressed (and share markets recovered).

Japanese economic data was mixed. Industrial production rose more than expected in January and labour market indicators remain strong. Against this real household spending remained weak.

China’s February round of business conditions PMIs were all disappointing suggesting that growth may have slowed a bit further early in the year. While this may be partly due to distortions associated with the Lunar New Year holiday, further monetary easing in the form of a 0.5% cut to 17% in the banks’ required reserve ratio indicates that the authorities are still focussed on boosting growth. With the reserve ratio remaining high further easing is likely ahead. Meanwhile, property prices continued to gain with the 100 city Soufun index seeing an average 0.6% gain in February. A risk is that a renewed speculative bubble in Tier 1 cities could be forming, which in turn could detract from equity holdings as the see sawing between shares and property continues.

Australian economic events and implications

Australian economic data was remarkably robust with GDP up a much stronger than expected 3% through 2015, manufacturing and services PMIs rising solidly in February, and January data showing gains in retail sales and new home sales and a narrowing in the trade deficit. While GDP growth is expected to slow back to around 2.5% this year as mining investment continues to contract, slowing wealth gains weigh on growth in consumer spending and as slowing building approvals lead to a slowing contribution to growth from home building its nevertheless likely to remain well supported. Low interest rates and the fall in the $A are clearly helping to support non-mining activity highlighted by surging export earnings from tourism and higher education, the coming on line of LNG export projects will also help sustain export volume growth and growth is likely to remain strong in the population rich states of NSW and Victoria.

While the RBA retained an easing bias at its March Board meeting and arguably strengthened it slightly by saying that “continued low inflation would [as opposed to may] provide scope for easier policy, should that be appropriate..” it’s hard to see them acting on it with growth running above their own forecasts and until unemployment rises more significantly. As such while I remain of the view that the RBA will need to cut interest rates again it has become a very close call.

Meanwhile, capital city home price growth was a moderate 0.5% in February with annual price growth of 7.6%, down from a recent peak of 11.1% last July. Momentum continues to slow in Sydney. For Sydney and Melbourne we continue to see a profile looking something like that seen in the chart below.

What to watch over the next week?

Globally the big focus in the week ahead will be on the ECB (Thursday) which is expected to respond to an intensification of deflation and bank risks in Europe by expanding its monthly quantitative easing program from €60bn to around €70bn possibly by including corporate debt. Another round of cheap bank financing is also possible, but doesn’t look to be necessary given that interbank lending rates remain low. The ECB may also consider another cutting its deposit rate by another 10 basis points (from -0.3% currently), but should think twice after the Bank of Japan’s bad experience.

In China, February economic data will start to flow but bear in mind that data around this time of year is often distorted by the Lunar New Year holidays. Trade data (Tuesday) is likely to show continued softness in exports and imports, inflation (Thursday) is likely to remain at 1.8% year on year with PPI deflation continuing to moderate slightly and credit flows are likely to slow from the huge surge seen in January. Meanwhile, the fourth session of the National People’s Congress (March 5-10) may see more stimulus measures announced with a bigger budget deficit (it was 3.5% of GDP in 2015) and some details around supply side reforms.

In the US, it’s going to be a quite week on the data front with only second order releases like small business confidence, inventories and import prices due for release. A speech by Fed Vice Chair Fischer will be watched for any clues on rates.

In Australia, expect to see continued modest growth in ANZ job ads (Monday), a slight rise in business confidence according to the NAB business survey (Tuesday), consumer confidence (Wednesday) to reverse some of last month’s rise on the back of uncertainty about taxation and a slight fall back in housing finance (also Wednesday) after a solid gain in December.

Outlook for markets

Shares have seen a decent rebound from oversold levels which may have further to go. But with the Fed still thinking of raising rates this year and global growth worries remaining the ride is likely to remain volatile in the short term. Beyond the near term uncertainties, we still see shares trending higher this year helped by a combination of relatively attractive valuations compared to bonds, further global monetary easing and continuing moderate economic growth.

Very low bond yields point to a soft medium term return potential from sovereign bonds, but it’s hard to get too bearish in a world of fragile growth, spare capacity, weak commodity prices and low inflation.

Commercial property and infrastructure are likely to continue benefitting from the ongoing search by investors for yield.

National capital city residential property price gains are expected to slow to around 3% this year, as the heat comes out of Sydney and Melbourne. Prices are likely to continue to fall in Perth and Darwin, but growth is likely to pick up in Brisbane.

Cash and bank deposits are likely to continue to provide poor returns, with the RBA expected to cut the cash rate to 1.75%.

An ongoing delay in Fed tightening and stronger data in Australia pose further short term upside risks for the $A. However, any short term strength in the $A is unlikely to go too far and the broad trend is likely to remain down as the interest rate differential in favour of Australia narrows as the RBA eventually resumes cutting the cash rate, commodity prices remain weak and the $A undertakes it’s usual undershoot of fair value.

By Shane Oliver, AMP Capital

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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) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties 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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