• Share markets continued to recover over the past week as QE3 ended in the US uneventfully, US profits and economic data continued to impress and news out of the Eurozone and Japan was a bit better than expected. US shares have now recovered 90% of the falls seen in their recent correction and Australian shares have recovered about 70%. Despite the rebound in share markets, bond yields were little changed. Commodity prices were mixed with gold sliding on the ending of US QE, but metal prices rose. While the Yen and the euro fell against the $US, the $A rose slightly.
• The main event over the past week was the Fed’s long anticipated ending of its quantitative easing program. The basic messages from the Fed are that the US economy, including the labour market, is continuing to improve justifying an end to QE but that there is no rush to raise interest rates signalling that it still anticipates a “considerable time” to elapse before the first rate hike. While the Fed is now dependent on how the data unfolds, our assessment is that the first rate hike won’t come till mid next year or later.
• While economic news in Europe remains messy there are two pieces of good news. First, the ECB’s bank stress tests are now out of the way with the results being slightly better than feared entailing capital raising of €5bn to be carried out over the next 6-9 months which is far less than has already occurred over the last year. More importantly, now that it’s out of the way Eurozone banks are likely to be less focused on shrinking their balance sheets and more focussed on lending. Second, a compromise appears to have been reached on French and Italian budget plans which may clear the way for a more relaxed fiscal approach in Europe.
• Geopolitical risks seem to be fading a bit: the threat from Ukraine is receding as the “ceasefire” seems to be holding and Russia has agreed to resume oil flows to Ukraine; the threat from the Hong Kong protests has faded; and there has been some more good news on Ebola with the WHO and others reporting signs that the number of new Ebola cases in Liberia may be peaking.
• The re-election of President Dilma Rousseff in Brazil highlights the messy outlook for the emerging world these days. Many badly need economic reforms, but while some like India seem to be embracing it, others like Brazil are opting for more of the same. In fact, Brazil and other countries in South America look to be sliding back into the old Latam populist ways that held them back for decades. The emerging world continues to offer huge opportunities for investors but you need to be a lot more selective than say a decade ago.

Major global economic events and implications

• US economic data continues to paint a picture of an economy not shooting the lights out, but doing okay. September quarter GDP growth was solid at 3.5% annualised, but was exaggerated by lumpy contributions from defence spending and trade and GDP is only up 2.3% year on year so it’s a long way from booming. More timely data shows the trend remaining up in durable goods orders, the Markit services PMI falling in October but to a still very strong level, home prices gradually rising nationwide and consumer confidence at a seven year high.
• September quarter earnings for US companies continue to impress. So far 348 S&P 500 companies have reported with 80% beating on earnings (compared to a norm of 63%) which look to be coming in around +10% year on year and 60% beating on sales where growth is running around 5% year on year.
• Eurozone economic data was if anything a little more positive than expected. The German IFO survey was worse than expected, but against this economic confidence amongst consumers and business rose in October confirming the earlier reported improvement in PMIs, there was a further improvement in the momentum of money supply and bank lending, the latest ECB bank lending survey showed increased loan demand and Spanish GDP rose in the September quarter for the fifth quarter in a row. So maybe Europe is not quite on the brink of the recession that many have been fearing lately.
• Japanese data provided signs it may be throwing off the hit to growth from the sales tax hike with September data showing good gains in industrial production and retail sales. That said labour market and household spending data was weaker than expected and core inflation ex the impact of the sales tax hike continues to run around just 0.5% year on year. Reports the Government pension fund will boost its share allocation is providing an additional boost to the Japanese share market.

Australian economic events and implications

• Australian data releases were light on. Export prices fell sharply again in the September quarter as had been expected given the falling iron ore price indicating a continuing fall in the terms of trade. Falling import and weak producer prices also highlight ongoing weak inflationary pressures. Meanwhile, investor credit for housing accelerated to 9.5% growth over the year to September which will likely serve to reinforce the RBA’s inclination to impose macro prudential controls. Against this though, while new home sales remain well up on their lows from two years ago, they were flat in September and have been basically flat all year now. There was some good news with a bounce in the weekly Roy Morgan consumer confidence index.
• While much excitement was generated by the Government’s increase in fuel excise next month the impact will be trivial, amounting to no more than a 0.3% increase in the price of petrol which will cost the average household no more than 20 cents a week. In fact, it will be swamped by the influence of the 20% fall in global oil prices over the last few months.

What to watch over the next week?

• In the US, the midterm Congressional elections (Tuesday) will be watched keenly because the Republicans will likely increase their House majority and get a small minority in the Senate. This is likely to be taken well by investors to the extent that Republicans are seen as more market friendly. While compromise with President Obama will still be needed it’s likely that the reduced Tea Party influence and President Obama’s desire for a positive legacy will see agreement reached on issues like raising the debt ceiling again in early 2015 (the current debt ceiling extension runs out in March 2015) and corporate tax reform. On the data front, expect more solid readings on the economy with the October manufacturing conditions ISM (Monday) to remain around the 56 level, the non-manufacturing ISM (Wednesday) to come in at around 58 and jobs data (Friday) to show a gain of 230,000 with unemployment remaining at 5.9%. Data for the trade balance (Tuesday) and productivity (Thursday) will also be released. September quarter earnings will also continue to be released.
• The ECB is unlikely to announce any further policy easing when it meets Thursday given its recent easing moves. Eurozone retail sales data will be released Wednesday.
• In Australia, the RBA is likely to leave interest rates on hold at 2.5% for the 16^th month in a row as nothing much has changed since the October meeting and benign inflation in the September quarter, sub-par growth and the still high $A support the case for rates to remain low. The RBA’s Statement on Monetary Policy (Friday) is expected to imply that rates will remain on hold well into next year. The Statement will also be watched for more details on possible macro prudential measures to slow property investment. While 16 months on hold sounds like a long time it’s still short of the 20 month record that was set between December 1994 and July 1996, but it’s likely this record will be breached as a rate hike looks unlikely until around mid-next year.
• On the data front we will get the usual avalanche that accompanies the turn of each month with data for house prices, the TD Inflation Gauge, jobs ads, the manufacturing conditions PMI and building approvals (all Monday), the trade balance and retail sales (Tuesday), the services PMI (Wednesday) and employment (Thursday). Of these expect to see a slight fall in building approvals and modest growth in retail sales. Given recent problems the jobs data are anyone’s guess but expect the unemployment rate to remain 6.1%.

Outlook for markets

• Having had a decent correction over September and into early October, shares are having a good rebound and are well placed to put on further gains into year-end as the cyclical bull market that started in 2011 remains alive and well. Valuations particularly against the reality of low bond yields are good; monetary policy is set to remain easy with QE in Europe and Japan replacing that in the US and rate hikes in the US and Australia being a long way off; and investor sentiment remains bearish and cautious, with it seems everyone worried about global growth and the end of QE3, which is positive from a contrarian perspective. Australian shares will benefit from the positive global lead and will also benefit from the lower Australian dollar. While my guesstimate of 5800 for the ASX 200 at year end is a bit of a stretch it’s not out of the ball park anymore with the ASX 200 having risen 350 points in less than 3 weeks.
• Low bond yields will likely mean soft medium term returns from government bonds. That said, in a world of too much saving, spare capacity and low inflation it’s hard to get too bearish on bonds.
• To its recent low of $US0.8640 the $A fell a bit too far too fast (just as the $US rose too far to fast), so a short covering bounce has been underway and could go further. That said, the broad trend in the $A is likely to remain down reflecting soft commodity prices, the likelihood the Fed hikes interest rates before the RBA and the relatively high cost base in Australia. Expect to see it fall to around $US0.80 in the next year or so.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

———–

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.

The post Weekly market & economic update – week ending October 31, 2014 appeared first on AdviserVoice.

• Chinese economic data: The Chinese economy grew at 7.3 per cent annual pace in the September quarter – ahead of forecasts (7.2 per cent) but the weakest growth in five years.
• The Chinese economy grew by 1.9 per cent in the September quarter, down from 2.0 per cent in the June quarter.
• Reserve Bank Board minutes: There was no discernible change in the tone of the Board minutes when it comes to view on interest rates. The Reserve Bank reiterated “that the most prudent course was likely to be a period of stability in interest rates”.
• Housing the key focus: Board members discussed the need to monitor and ensure responsible lending practices. Policymakers noted that “the current setting of monetary policy was accommodative, with lending rates remaining very low and continuing to edge lower over recent months as competition to lend had increased. In this context, members discussed the importance of lenders maintaining strong lending standards and the ongoing dialogue between the Bank and APRA on the matter”.
• Consumer confidence falls: The weekly ANZ/Roy Morgan consumer confidence rating eased by 1.9 per cent in the week to October 19 after lifting by 1.1 per cent in the prior week.

What does it all mean?

• There are two reasons why the Chinese economic data is important. First, China is the biggest driver of the global economy. And second, China is Australia’s largest trading partner.
• Overall it is clear that the Chinese economy slowed over the past year with growth in the September quarter easing from 2.0 per cent to 1.9 percent. The world’s second largest economy is growing at a 7.3 per cent annual pace. Yes, it is the slowest growth rate in five years but importantly inflation remains well contained. In fact the result was ahead of forecasts, while the monthly data showed a surprising lift in industrial production.
• Importantly the slowdown was engineered by policymakers to ensure that a sustainable level of growth is maintained. In addition Chinese officials have made it clear that they are willing to sacrifice a faster pace of growth in order to correct imbalances across the economy – predominately focusing on improving environmental reforms, more transparency in the financial system and more equitable social reforms.
• Whether it is production, investment or retail spending, growth rates will slow in coming years as the economy matures. But an economy of 1.3 billion people travelling at around a 7 per cent annual pace is a sight to behold. The focus will now shift to the HSBC/Markit “flash” October manufacturing activity index, out next Thursday.
• The Reserve Bank continues to preach stability in interest rates. There is nothing in the latest minutes to suggest that Board members have become more optimistic, nor more pessimistic. The Board believes that the cash rate is at the right level to support the economy and keep inflationary pressures in check.
• However the Central Bank did once again discuss the ongoing lift in investor housing demand, noting that annual growth of investor demand has increased by close to 10 per cent compared with around 7 per cent growth in overall housing credit. Interestingly the focus by Board members was on ensuring responsible and sustainable lending practices with “ongoing dialogue between the Bank and APRA on the matter”.
• The Reserve Bank will continue to assess measures to cool the demand for investor housing. Importantly policymakers will take a soft approach when introducing any new measures.
• Despite the latest pullback, consumer confidence remains healthy. Over the past few months households have been generally upbeat, shrugging off global economic concerns. The mild pullback over the past week is probably more to do with the recent slide in equity markets than any deep structural issue with household finances.
• In fact even in the latest survey Aussie households’ views about their finances over the next 12 months held at 6½-month highs. In addition confidence levels are holding just 4 per cent shy of the seven month highs reached in late July.

What do the figures show?

Consumer sentiment:

• The ANZ/Roy Morgan consumer confidence rating fell by 1.9 per cent to 111.6 in the week to October 19 after rising by 1.1 per cent in the previous week. The confidence rating is down 4.0 per cent on the 7-month highs recorded for the week to July 27.
• Four of the five components of the index fell in the latest week:
• The estimate of family finances compared with a year ago was down from +9 to +4;
• The estimate of family finances over the next year was unchanged from +25 to +25;
• Economic conditions over the next 12 months was down from -4 to -5;
• Economic conditions over the next 5 years was down from +4 to +3;
• The measure on whether it was a good time to buy a major household item was down from +35 to +31.

Reserve Bank Board minutes:

• Minutes of the Reserve Bank Board meeting held on October 7 can be found here.

Chinese economic data

• The Chinese economy grew at a five-year low of 7.3 per cent annual pace in the September quarter, mildly ahead of forecasts (7.2 per cent). The economy grew by 1.9 per cent in the September quarter, down from 2.0 per cent in the June quarter.
• Industrial production rose at an 8.0 per cent annual rate in September, above the forecast average (7.5 per cent) and up from the 6.9 per cent annual rate in August. Production was up by 8.5 per cent on a year ago for the first nine months of 2014.
• Retail sales rose at an 11.6 per cent annual rate in September, mildly below forecasts (+11.7 per cent) and down from the 11.9 per cent annual rate in August. Over 2014, annual growth has averaged 12.0 per cent. But in real terms, spending was up 10.4 per cent in September – the fastest growth in nine months.
• Urban investment rose at a 16.1 per cent annual rate in the first nine months of 2014, below forecasts of a 16.3 per cent increase and below the 16.5 per cent growth recorded for the eighth months to August.

Imports of goods:

•  “In seasonally adjusted terms, goods debits rose $1,480m (7 per cent) between August and September 2014 to $22,948m. Intermediate and other merchandise goods rose $973m (11 per cent), capital goods rose $187m (4 per cent), consumption goods rose $186m (3 per cent) and non-monetary gold rose $135m (59 per cent).”
• The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the reserve Bank.
• The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.
• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 16th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10^th of each month. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.
• At present the Reserve Bank is in a delicate balancing act of keeping interest rates low to support the broader economic recovery while hoping house price growth eases over the medium term. And the ongoing lift in home building should provide policymakers with some added comfort.
• The latest Chinese economic data was mildly better than expectations. And while the longer term growth story remains sound, it is likely that the ongoing structural reform in China is likely to create further volatility and ongoing patchiness in activity in coming months.
• The latest data give the Reserve Bank no reason to change its views on the economic recovery or interest rates. Low rates will continue to foster stronger domestic growth. CommSec expects no change to monetary policy until next year with one rate hike pencilled in the March quarter of 2015.

What is the importance of the economic data?

• The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the reserve Bank.
• The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.
• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 16th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10^th of each month. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.

What are the implications for interest rates and investors?

• At present the Reserve Bank is in a delicate balancing act of keeping interest rates low to support the broader economic recovery while hoping house price growth eases over the medium term. And the ongoing lift in home building should provide policymakers with some added comfort.
• The latest Chinese economic data was mildly better than expectations. And while the longer term growth story remains sound, it is likely that the ongoing structural reform in China is likely to create further volatility and ongoing patchiness in activity in coming months.
• The latest data give the Reserve Bank no reason to change its views on the economic recovery or interest rates. Low rates will continue to foster stronger domestic growth. CommSec expects no change to monetary policy until next year with one rate hike pencilled in the March quarter of 2015.

The post Chinese growth at five year lows appeared first on AdviserVoice.

• Global shares had another rough week on worries about global growth and the Ebola scare continued to build. This saw most share markets fall, but Australian shares having led on the way down managed to rise over the last week as investors started to look for bargains. 8% yields on Australian banks are hard to resist. Global shares are now down 8.5% from their September high and Australian shares are down 6.8% (although this has been pared from an 8.9% decline to the low on Monday. Bond yields continued to slide on global growth fears and on the back of safe haven buying. Commodity prices remained under selling pressure but the Australian dollar rose slightly as the $US pulled back a bit on talk that the Fed may delay the end of QE and/or rate hikes.
• While doom and gloom is now rife, there are some signs that shares may be at or close to a low: the 8.5% correction in global shares is around the size of the average correction seen since the current bull market began; in fact US and Australian shares have had a healthy correction of nearly 10% top to bottom using intraday data; markets that led on the way down like Australian shares and US small caps have been clawing back in the last few days; the last few sessions have seen US and Australian shares rebound from intraday lows suggesting that bulls may be starting to get the upper hand; investor sentiment is now so bad that its good – with our composite measure of investor sentiment in the US having fallen to levels often associated with share market lows (see chart at left below); and the month of October is known for seeing shares start to turn back up ahead of a rally into year-end (chart at right). And the fall in share markets has seen shares move well into cheap territory (with the forward PE on Australian shares at around 13.7 times being well below its long term average) and lower bond yields also adding to the relative cheapness of shares.

• The Fed may delay ending QE and rate hikes. Various Fed officials have added to the message that the Fed will allow for the impact of softer global growth and the stronger $US and that it may result in a delay to rate hikes. I suspect that they might now get pushed into the September quarter next year. Two Fed officials even referred to possibility of more quantitative easing or a delay to the end of the current program if needed to head off falling inflation expectations. Fed President Bullards comment regarding extending QE are particularly significant because he often provides a lead on where the Fed is heading. The key is that the Fed is not on a pre-set path towards monetary tightening and there is now a good chance that QE will not end this month.
• In Australia, RBA Assistant Governor Guy Debelle reiterated the view that the $A is still too high and the RBA’s concerns about the potential for financial market volatility and in particular warning of a potential “violent” sell off in fixed income markets if the outlook for low interest rates changes. Of course the latter was taken out of context by the media in referring to financial markets generally – as they say bad news sells! At this stage though there is no sign of any end to the low interest rate environment. Yes we are getting the volatility, but bonds are rallying as global growth is yet again disappointing pushing out any eventual global monetary tightening/higher interest rates. More broadly central banks and the IMF need to be very careful in what they wish for here. In providing monetary stimulus a key aim was that investors take on more risk thereby spreading easier monetary conditions through the economy and facilitating economic recovery. Warnings to the effect that we are now seeing unsustainable bubbles (I don’t see many), frothy markets and the risk of violent sell-offs to the extent it adds to investor panic risks undoing all they have sought to achieve over the last few years.
• The risk around Ebola is clearly continuing to increase with more cases in the US after botched medical protocols. Our base case remains that it should be easier to control its spread in the US and in western countries and as such it will remain largely contained to Africa but with short term bouts of share market volatility around Ebola scares. But recent events in the US suggest that the risks have gone up.

Major global economic events and implications

• US economic data was mixed with retail sales falling more than expected in September, albeit after a strong August, manufacturing conditions deteriorating in the New York region, small business confidence down slightly and home builder conditions falling but against this jobless claims continued to slide, industrial production rose strongly, manufacturing conditions in the Philadelphia region remained strong and the Fed’s  Beige Book of anecdotal evidence described growth as modest to moderate. Weak producer price inflation highlighted the risk that US inflation will continue to undershoot the Fed’s 2% inflation objective. There was some very good news with the budget deficit in fiscal 2014 falling to 2.8% of GDP (lower than Australia’s budget deficit!) which is well down from its 10% peak in 2009. It’s also noteworthy that falling mortgage rates and gasoline prices are set to provide a boost to household finances.
• It’s still early days in the US reporting season for September quarter profits but so far so good. Of the 71 S&P 500 companies to have reported so far, 74% have beaten earnings expectations (against a norm of 63%) and 61% have beaten on sales.
• Eurozone data was mostly soft with industrial production down in August and the ZEW survey of investment analyst confidence falling sharply in October. German unemployment fell to 6% though providing some positive news.
• Chinese credit growth continued to slow, albeit remaining solid, but money supply growth picked up marginally and trade data provided positive news with much stronger than expected growth in exports and imports for September. Inflation data was also weaker than expected with CPI inflation at its lowest in more than four years and the annual rate of decline in producer prices accelerating. Quite clearly China is operating well below its potential adding to global deflationary risks and there’s significant potential for rate cuts.
• India also saw good news on the inflation front with both consumer and whole sale price inflation falling sharply suggesting the next move by the Reserve Bank of India will be a rate cut. That global interest rates are still going down, not up was highlighted by a cut in Korea’s policy rate to 2% from 2.25%.

Australian economic events and implications

• Australian economic data was somewhat subdued with a fall back in business conditions and confidence to below average levels (albeit at least up on last year’s lows) and only a modest rise in consumer confidence in October leaving it below average levels too. Dwelling commencements also fell in the June quarter but after two very strong quarters and with building approvals pointing to a rebound in the September quarter. Dwelling starts are running around 180,000 pa which is in line with underlying demand after many years of shortfalls.

What to watch over the next week?

• In the US, September inflation data (Wednesday) is likely to remain benign with inflation falling to 1.6% year on year adding to the lack of pressure on the Fed to eventually raise interest rates. Meanwhile existing home sales (Tuesday) and house prices (Thursday) are expected to show modest gains, but expect new home sales (Friday) to reverse some of the 18% gain seen in August. Markit’s manufacturing conditions PMI (Thursday) is expected to have remained strong at around 57.5.
• In the Eurozone, Markit’s business conditions PMIs are expected to remain down on the highs seen in July continuing to raise concerns about a loss of momentum in growth. The main focus though will likely be on the October 26^th release of the ECB’s much anticipated bank Asset Quality Review and Stress Tests. This will assess the adequacy of 130 Eurozone banks’ capital levels against both baseline and adverse scenarios and those that fail will be given 6 to 9 months to boost their capital ratios. Some failures are possible but mainly for unlisted and mutual banks, but not many of the major listed banks are likely to fail given pre-emptive capital raisings (€75bn since 2013) and conservative lending practices in the lead up to this review. In fact, just as occurred with the Fed’s stress test of US banks in 2009 it could prove to be a watershed event that helps restore confidence in Eurozone banks and clears the way for more bank lending.
• Chinese activity data for September (Tuesday) is expected to show a bounce in industrial production to 7.5% year on year growth from 6.9%, but a further slight loss of momentum for retail sales and fixed asset investment. Stronger exports are likely to have helped support GDP growth but not enough to prevent a further slight slowing to around 7.2% year on year. The HSBC flash manufacturing PMI for October (Thursday) is likely to have remained around the 50 suggesting relatively stable growth.
• In Australia, the focus will be on September quarter inflation data (Wednesday) and a speech by RBA Governor Stevens (Thursday). September quarter inflation is likely to be benign helped by lower petrol and fruit & vegetable prices and the removal of the carbon tax. Expect headline inflation of 0.4% quarter on quarter and 2.2% year on year and underlying inflation of 0.5% quarter on quarter and 2.6% year on year. RBA Governor Steven’s speech will be watched for any updated comments on the outlook for interest rates but he is likely to retain the on hold with a dovish tone evident in the RBA’s last post meeting statement. The minutes from the last meeting (Tuesday) and speeches by RBA officials Kent and Lowe will also be watched closely but are all unlikely to signal any deviation from the RBA’s “period of stability” stance on interest rates.

Outlook for markets

• Our assessment remains that recent falls in shares represent a correction and not the start of a new bear market. Share valuations have now pushed well into cheap territory (the forward PE on Australian shares has fallen from 14.8 times to 13.7 times), the global growth outlook remains for okay growth (“not too hot, but not too cold”), monetary conditions globally and in Australia look like they will remain very easy with Europe and Japan filling the quantitative easing gap that will be left by the US and US rate hikes looking even further away and investor sentiment is now very bearish again which is positive from a contrarian perspective. The lower Australian dollar will also help boost growth in Australia and eventually profits. So for these reasons the correction should be seen as providing a buying opportunity. October is often a month where market falls come to an end ahead of the Santa Claus rally into year end and I expect to see the same happen this year.  Seeing the ECB’s bank stress test results and the ECB start up its QE program (both later this month) are likely to help in this regard.
• Low bond yields will likely mean soft medium term returns from government bonds. That said, in a world of too much saving, spare capacity and low inflation it’s hard to get too bearish on bonds.
• n the short term the Australian dollar has fallen too far too fast (just as the $US has risen too far to fast), so a short covering bounce could well emerge. That said the broad trend in the $A is likely to remain down reflecting soft commodity prices, the likelihood the Fed hikes interest rates before the RBA and the relatively high cost base in Australia. Expect to see it fall to around $US0.80 in the next year or so.

——–

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

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.

The post Weekly market & economic update – week ending 17 October, 2014 appeared first on AdviserVoice.

• Share markets were mixed over the last week with Eurozone shares up on the ECB’s monetary easing and talk of a ceasefire in Ukraine, Japanese and Chinese shares up but US shares down partly on worries that strong data might bring forward a Fed rate hike and Australian shares down. Bond yields mostly rose, but yields in peripheral Eurozone continued to slide. The ECB easing saw the euro continue to slide with the rising $US weighing on commodity prices, but the $A remaining stubbornly strong despite a sliding iron ore price.
• ECB announces quantitative easing (QE). In response to poor growth and the rising risk of deflation the ECB eased more than expected in announcing a 0.1% cut to its official interest rate taking it to just 0.05% and that it will begin buying asset backed securities with the aim of expanding its balance sheet by €1 trillion. The ECB won’t announce the details of its asset buying program till next month, but by indicating it will include mortgage backed securities and covered bonds it has effectively allowed a much larger scale program. It’s not US style QE as the ECB will not be buying government bonds (at this stage anyway), but it will have the same effect in pumping cash into the economy, displacing investors from relatively low risk investments and forcing them to take on more risk which will lower the cost, and improve the availability, of funding throughout the economy. And its latest rate cut will lower the cost of cheap four year funding for the banks to just 0.15% pa. Will it work? It will certainly help, particularly all the talk of money printing will head of a deflationary mentality taking hold.
• Ukraine is not over yet. While there was a bit of hope regarding a possible cease fire in Ukraine, this may be Russia’s attempt to look constructive ahead of a NATO summit. At this point the two sides still look far apart and so it’s too early to get optimistic. There are essentially three scenarios worth considering for investors regarding Ukraine. First a peaceful resolution soon, which would probably see Ukraine stay out of the EU and NATO to appease Russia. Second, an escalating war between Ukraine and Russia. Third, an escalating war that draws in direct military involvement from the West led by the US and Europe. Of these: the first would be a minor positive for global share markets but would quickly be forgotten; the second would be a source of volatility but like now would only be a major issue if sanctions get ramped up, but would ultimately not derail the global economic expansion; and the third would be a major concern for the global economy and hence could see a sharp fall in share markets. However, the chance of third scenario occurring – ie direct conflict between the West and Russia occurring is very low. The West may respond with escalating sanctions and NATO sabre rattling but it’s very unlikely to engage in anything approaching direct conflict with Russia for the same reason it didn’t through the Cold War (ie Russia is a nuclear power). So we remain of the view that Ukraine will likely remain a source of uncertainty for investors (and slower growth for Europe), but it’s unlikely to derail the global economic expansion.
• In Australia, there was nothing new from the RBA which left interest rates on hold for the 13th month in a row and reiterated that a period of stability remains prudent with this message effectively backed up by a speech by Governor Stevens. Right now the uncertainty around the economic outlook and the strong $A preclude any thought of a rate hike, but by the same token signs the economy is responding to lower rates and the risk of boosting financial risk and house prices preclude rate cuts.
• Meanwhile, there seems to be lots of doom and gloom on Australia lately with talk of the economy in the “danger zone” and even ads on my iPad apps screaming “Australian recession 2014 – why it’s unavoidable…” This is way over the top! Sure the fall in commodity prices and specifically the iron ore price is a blow to national income. But thankfully lower interest rates are helping to drive a bounce back in the sectors of the economy like housing and retailing that were suppressed by the mining boom. And there is still plenty of scope for interest rates to fall further if needed and for the Australian dollar to fall, which I think it will over time, providing a shock absorber for the economy. But the real story on the Australian economy – as evident in the data seen over the last week – is that the shift back to a more balanced economy is proceeding.
• It’s been a somewhat messy week for policy making in Australia. The mining tax hit the dust, but the increase in the super levy has been delayed yet again, leaving likely super retirement savings inadequate for most workers needs and there’s talk of a fund to bailout failing companies. While the latter is nice in theory, in practice such government intervention rarely works, so hopefully the Government will reject it.

Major global economic events and implications

• US economic data was pretty solid with the ISM indexes rising to very strong levels, construction activity and auto sales rising solidly and labour market indicators remaining strong. This is all keeping alive the prospect of a Fed rate hike coming earlier than mid next year.
• In Europe, economic news was mixed with a downwards revision to August PMIs albeit to levels still consistent with modest growth but a sharp rebound in German factory orders.
• The Bank of Japan made no changes to its super stimulatory monetary easing program. But there was good news on the economic front with nominal cash wages up 2.6% over the year to July suggesting wages growth and inflationary expectations are responding to the BoJ’s campaign to end deflation.
• Chinese economic data was mixed with the manufacturing conditions PMI for August falling back a bit, but services conditions PMIs strengthening suggesting that overall growth remains okay.

Australian economic events and implications

• The avalanche of economic data in Australia over the last week painted a reasonably hopeful picture for the economy. Sure the ongoing slide in the terms of trade is a blow and growth slowed in the June quarter, but the growth slowdown was nowhere near as bad as many feared and there are clear signs of improvement in the non-mining economy. Given that the main reason for the slump in quarterly growth from 1.1% in the March quarter to 0.5% in the June quarter relates to volatility in exports and imports it makes sense to average the two quarters which gives 0.8% quarter on quarter or 3.2% annualised, which is a pretty good outcome given the circumstances. More fundamentally, July data for retail sales point to a bounce back in consumer spending growth in the current quarter, the trade deficit also improved in July suggesting that net export volumes are likely to bounce back and continued strength in building approvals points to ongoing growth in dwelling construction.
• The June quarter National Accounts also included a couple of long term positives for Australia. First, productivity growth is solid at 3.2% year on year in the market sector, which will help minimise the hit to living standards from the fall in the terms of trade. Second, the household saving rate remains strong at 9.4% indicating households have a good buffer against shocks to income and are continuing to improve their net debt position.

What to watch over the next week?

• In the US, August retail sales data (Friday) are expected to show modest growth after the disappointingly flat outcome for July. This is likely to be supported by a further lift in consumer confidence (also Friday).
• In China, the focus will be on data releases for August. Expect trade data (Monday) to show exports up 10% and imports up 4%, lending and credit data to show a bit of a bounce back after weakness seen in July, CPI inflation (Wednesday) falling back to 2.2% year on year and slight moderations in growth for retail sales, fixed asset investment and industrial production (Saturday).
• In Australia, expect ANZ job ads (Monday) to show a further trend gain, housing finance (Tuesday) to rise 1%, the NAB business confidence and conditions measures (also Tuesday) to remain around the reasonably solid levels seen in July, consumer confidence (Wednesday) to show a further slight improvement and employment to show a 10000 gain with unemployment falling back to 6.3% after July’s partly statistical spike.

Outlook for markets

• While shares have seen a strong recovery from the early August mini-slump, the correction season consistent with the old adage “sell in May, go away and come back on St Leger’s Day” is still upon us with September historically being the weakest month of the year for US shares and the September-October period often being tough in Australia.Relatively high short term optimism readings in the US also warn of the risk of a correction and there is no shortage of potential triggers including worries about the Fed and Ukraine.
• However, despite the risk of another correction the cyclical bull market in shares likely has a lot further to go as we still don’t see the signs of shares being over valued, over loved and over bought normally seen at major market tops.Valuations remain okay particularly once low interest rates and bond yields are allowed for, global earnings are continuing to improve on the back of gradually improving economic growth, monetary conditions are set to remain easy for some time and there is no sign of the euphoria that comes with major share market tops. In fact, in terms of the latter there still seems to be a lot of wariness regarding shares.
• Low bond yields, eg 10 year yields of just 0.5% in Japan and 3.4% in Australia, will likely mean soft returns from government bonds.
• The combination of soft commodity prices, the likelihood the Fed will start raising interest rates ahead of the RBA and relatively high costs in Australia are expected to see the broad trend in the $A remain down. Expect to see $US0.80 in the next few years, but getting the timing right is hard.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist, AMP Capital

————

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.

The post Weekly market & economic update – week ending 5 September, 2014 appeared first on AdviserVoice.

• Share markets generally moved higher over the last week as some soft economic data highlighted the need for continued easy global monetary conditions and as geopolitical risks receded a bit. The Australian share market was also supported by good profit results. Bond yields were flat to down, including in peripheral Eurozone countries. Commodity prices generally fell but the $A rose slightly on expectations that the Fed’s first rate hike might be pushed out further and as confidence readings in Australia improved.
• The past week saw a slight reduction in geopolitical risks with President Putin sounding somewhat more constructive regarding Ukraine and Iraqi PM Nouri al-Maliki stepping down hopefully clearing the way for a more inclusive Iraqi government. This means investors can perhaps go back to focussing on economic fundamentals, but any of them could easily flare up again.
• A key concern of investors this year has been about when the Fed will start to raise interest rates as part of a broader sign that the period of ultra-easy global monetary conditions is coming to an end. However, it’s clear that the global economic recovery remains very much a two steps forward, one step back affair and this was clearly evident over the last week with poor June quarter GDP data for both the Eurozone and Japan, disappointing US retail sales data suggesting September quarter GDP growth could slip back below 3% and Chinese July data coming in weaker than expected. And of course various geopolitical events continue to wax and wane and the threat from Ebola remains in the background. Against this backdrop its hard to see the Fed wanting to rock the boat any time soon with talk of higher interest rates, let alone actual rate hikes, and other central banks are likely to maintain ultra-easy policy and may even have to ease further. As if to highlight this point, both Korea and Chile cut interest rates in the last week.

Major global economic events and implications

• US economic data provided a mixed picture with a further rise in job vacancies and small business optimism but continued softness in mortgage applications and flat July retail sales. There was nothing to budge Fed Chair Janet Yellen from her positive but cautious perspective regarding the US economy and her reluctance to rush into raising interest rates.
• The Eurozone was weaker than expected in the June quarter with growth stalling as slight declines in Germany and Italy offset gains in most other countries including Spain and Portugal. This was disappointing given that the level of business conditions PMIs points to growth running around 0.4% quarter on quarter. Nevertheless, continuing sub-par growth, poor growth in bank lending and inflation of just 0.4% year on year and the impact on confidence and trade from the Ukraine crisis highlights that the ECB needs to do more.
• In the UK, the Bank of England’s inflation report revised down its wage growth forecasts yet again implying the first BoE rate hike is getting pushed out.
• The Japanese economy went backwards in the June quarter. While this expected given the sales tax hike and forward looking indicators point up, there’s still a way to go before Abenomics can be declared victorious.
• Chinese data for July was softer than expected but still looks consistent with GDP growth around 7.5% this year. Growth in activity indicators, monetary aggregates and credit all slowed from June, but remain solid with eg industrial production up 9% year on year and credit up 15.8% year on year and in a range consistent with the Government’s growth target. With interbank lending rates having fallen lately it looks like monetary conditions have been eased again this month. What does seem clear though is that while China is not going to have a bust it won’t be going back to last decade’s booming growth rates either.

Australian economic events and implications

• Australian economic data provided a mixed bag. The good news was that business conditions and confidence both rose in July to reasonable levels, consumer confidence has continued to recover from its Budget related scare and house prices are continuing to rise but at roughly half the rate over the first six months of the year compared to the last six months of last year. Against this, wages growth remains at a record low with real wages continuing to decline which is bad news for household income but good news for inflation. The bottom line is that the economy is nowhere near as weak as feared and if anything appears to be picking up pace after what looks to have been a poor June quarter but it’s a long way from being strong and the low rate of growth in wages and the slowing in house price appreciation provides plenty of scope for the RBA to keep interest rates on hold.
• We are now one quarter through the June half profit reporting season and while it’s dangerous to draw any firm conclusions early on given the tendency for well performing companies to report up front, the results to date have been reasonably good. 50% of companies have exceeded expectations (compared to a norm of 43%); 72% of companies have seen their profits rise from a year ago (compared to a norm of 66%); 63% of companies have increased their dividends from a year ago (up slightly from around 62% in the last two years); and 59% of companies have seen their share price outperform the market on the day they released results. Key themes have been continued strength for resources (notably Rio), banks doing well (with good results from CBA), ongoing cost control making up for still soft revenue growth and strong growth in dividends. The bottom line is that Australian earnings look to be on track to have increased by around 12% last financial year, with a 28% surge in resources’ profits, a 10% rise in bank profits and a 3% rise in profits for the rest of the market.

• In the US, July inflation data (Tuesday) is expected to confirm that inflation remains benign with headline inflation of 2% year on year and core inflation of 1.9% year on year and the Fed’s Jackson Hole symposium (Thursday to Saturday) is likely to see the core leadership of the Fed stick to its positive but cautious assessment regarding the state of the US economy, all of which is likely to reinforce expectations that a shift to monetary tightening is still a long way off. The minutes from the Fed’s last meeting (Wednesday) will also be released). On the economic activity front, we expect a modest further rise in the home builder’s conditions index (Monday), solid gains in housing starts and permits (Tuesday) after the weakness seen in June, a slight fall in existing home sales (Thursday) and continued solid reading from the Markit manufacturing conditions PMI (also Thursday).What to watch over the next week?
• In the Eurozone, the focus will be on July manufacturing and services conditions PMIs (Thursday) – a further improvement would be nice but recent poor headlines and the Russian trade sanctions risk driving a slight fall.
• In Japan, the Markit manufacturing PMI for July (Thursday) will be watched for further signs of improvement following its tax hike induced weakness.
• China’s HSBC flash manufacturing PMI for July (Thursday) is likely to hold around June levels.
• In Australia, the minutes from the RBA’s last Board meeting (Tuesday) and Governor Steven’s Semi-Annual Parliamentary testimony (Thursday) are likely to confirm that rates will remain on hold, but with a slight dovish bias. Of particular interest will be the Governor’s comments on the $A which may see a bit more follow on jawboning from his comments in early July in an effort to push it lower.
• It will also be the busiest week of the Australian June half profit reporting season with 90 major companies due to report, including BHP, Stockland, IAG, Toll Holdings, Coca-Cola Amatil, Origin and AMP. Consensus earnings estimates for 2013-14 are for 12% growth and for 2014-15 are more modest at +5%.

Outlook for markets

• The correction seen in shares over the last few weeks is a healthy development serving to relieve a bit of complacency that had started to build up during the first half. More broadly the trend in shares is likely to remain up and, while it’s impossible to be sure given uncertainties around various geopolitical risks, we may have already seen the low. Valuations were not onerous at recent highs, global earnings are continuing to improve on the back of gradually improving economic growth, monetary conditions are set to remain easy for some time and there is no sign of the euphoria that comes with major share market tops. Our year-end target for the ASX 200 remains 5800.
• Low bond yields, eg 10 year yields of just 0.5% in Japan and 3.3% in Australia, will likely mean soft returns from government bonds.
• The combination of soft commodity prices, the likelihood the Fed will start raising interest rates ahead of the RBA and relatively high costs in Australia are expected to see the broad trend in the $A remain down. Expect to see $US0.80 in the next few years, but as always with currencies getting the timing right is going to be hard.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

—–

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.

The post Weekly market & economic update – week ending 15 August, 2014 appeared first on AdviserVoice.

• 

  Petrol prices have fallen

  Lending soars. Total lending finance soared by 7.6 per cent in June, underpinned by a 12.1 per cent lift in business lending. Total new lending in June was $72.9 billion – the highest since January 2008.

• Petrol prices fall: According to the Australian Institute of Petroleum, the national average Australian price of petrol fell by 1.0 cent per litre to 148.3 cents a litre in the week to August 10 – the lowest since the week to December 1 2013. The wholesale price continues to slide, hitting a near 9-month low.

What does it all mean?

• Lending has returned to levels prior to the global financial crisis. In fact, in original terms, lending totalled $84.1 billion in June 2014, the second highest total on record behind June 2007 ($90.8 billion). While growth is being driven by business lending, both personal and housing loans are well up on a year ago. Simply, consumers and businesses are embracing cheap financing. And hopefully in the case of business, some of the extra dollars are being put to work in new investment, in turn leading to the hiring of more staff.
• It may be hard to gauge given the discounting cycles in many capital cities, but there is good news for motorists. The pump price is at 8-month lows and the wholesale petrol price continues to slide, reaching levels last seen in mid-November last year. If the lower prices can be maintained, motorists will save around $13 a month on filling their cars with petrol. Simply the world is well supplied with petrol and global oil demand remains soft.

What do the figures show?

Lending Finance:

• Total new lending commitments (housing, personal, commercial and lease finance) rose by 7.6 per cent in June to a 6½-year high of $72.9 billion. It was the biggest lift in lending in 27 months.
• Housing finance: The seasonally adjusted measure of construction and new purchases rose by 1.8 per cent in June while alterations & additions rose by 2.2 per cent. Home loans are up 10.8 per cent on a year.
• Commercial finance: The seasonally adjusted series for the value of total commercial finance commitments rose by 12.1 per cent in June. Revolving credit commitments rose by 38.4 per cent, the fourth straight gain. Fixed lending commitments rose by 0.9 per cent. Business loans are up 29.4 per cent over the year.
• Personal finance: The seasonally adjusted series for the value of total personal finance commitments fell by 1.8 per cent in June after rising by 8.5 per cent in May. Revolving credit commitments fell by 3.3 per cent and fixed lending commitments fell by 0.6 per cent. Personal loans are still up 11.4 per cent over the year.
• In terms of fixed personal loans, car finance was up by 5.5 per cent over the year; debt consolidation rose by 2.6 per cent; refinancing rose by 7.7 per cent; loans to buy land rose by 18.6 per cent; and “other” loans were up by 18.0 per cent. Overall, personal fixed loans were up by 9.7 per cent over the year.
• Lease finance: Lending rose by 1.2 per cent in June but fell by 12.9 per cent over the year.

Petrol prices

• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol fell by 1.0 cent a litre to 148.3 c/l in the week to August 3. The slide in prices reflected cyclical lows in the discounting cycles that exist in southern and eastern capital cities. The metropolitan price fell by 1.1 cents to 145.5 c/l, while the regional average price fell by 0.6 cents to 154.0 c/l.
• Average unleaded petrol prices across states and territories over the past week were: Sydney (down by 3.0 cents to 140.9 c/l), Melbourne (up by 0.6 cents to 144.1 c/l), Brisbane (up by 4.1 cents to 149.8 c/l), Adelaide (down by 11.0 cents to 141.9 c/l), Perth (down by 2.5 cents to 148.3 c/l), Darwin (unchanged at 173.0 c/l), Canberra (down 0.1 c/l to 155.7 c/l) and Hobart (down 0.2 c/l to 160.5 c/l).
• Today, the national average wholesale (terminal gate) unleaded petrol price stands at 136.3 c/l, down around 2.5 cents over the week and the lowest level in almost nine months (November 18 2013).
• Last week the key Singapore gasoline price rose by just US6 cents to US$113.41 a barrel – just above the lowest levels seen in eight months. In Australian dollar terms the Singapore gasoline price rose by 70 cents barrel or 0.6 per cent last week to $122.66 a barrel or 77.14 cents a litre, just above the lowest levels seen in 8½ months.
• Figures from MotorMouth show that petrol prices in Melbourne and Brisbane hit the peak levels in the discounting cycle in the past few days. In Sydney, petrol prices have fallen for 28 days – well past the usual 12-14 days cycle. Adelaide petrol prices are near the lows, having fallen for 15 days.
• Lending Finance is released monthly by the Bureau of Statistics and contains figures on new housing, personal, commercial and lease finance commitments. The importance of the data lies in what it reveals about the appropriateness of interest rate settings, confidence and spending levels in the economy.
• Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum (AIP). National average retail prices are calculated as the weighted average of each State/Territory’s metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in each of these regions. AIP data for retail petrol prices is based on available market data supplied by MotorMouth.
• The economy has healthy momentum, being provided by recovering consumer confidence, increased lending and solid home construction. While the environment is especially favourable for businesses dependent on home construction and purchase, the outlook is improving for equipment and services businesses and discretionary retailers. The drop in the price of petrol removes one potential source of angst from Aussie consumers.

Why is the data important?

• Lending Finance is released monthly by the Bureau of Statistics and contains figures on new housing, personal, commercial and lease finance commitments. The importance of the data lies in what it reveals about the appropriateness of interest rate settings, confidence and spending levels in the economy.
• Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum (AIP). National average retail prices are calculated as the weighted average of each State/Territory’s metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in each of these regions. AIP data for retail petrol prices is based on available market data supplied by MotorMouth.

What are the implications?

• The economy has healthy momentum, being provided by recovering consumer confidence, increased lending and solid home construction. While the environment is especially favourable for businesses dependent on home construction and purchase, the outlook is improving for equipment and services businesses and discretionary retailers. The drop in the price of petrol removes one potential source of angst from Aussie consumers.

The post Lending hits 6½-year high. Petrol at 8-month low appeared first on AdviserVoice.

• Global shares had a poor week with a range of issues reportedly weighing with more sanctions on Russia and worries about the Fed, earnings, Banco Espírito Santo and Argentina’s “default”. This dragged down global shares for July by 1%. While Australian shares got hit on Friday it came after a very strong month with the ASX 200 up 4.4% in July. The “risk off” move by investors weighed on the euro and $A, commodities were mixed with oil down but metals up and bond yields actually rose in the US and Australia.
• Many of the reasons reportedly unnerving investors look to reflect isolated instances rather than systemic problems, ie more like an excuse for a correction: Banco Espirito Santo’s situation is not indicative of other Eurozone banks; Argentina’s problems are well known and its “default” reflects a problem with a hedge fund rather than broader emerging market debt problems; tougher sanctions for Russia will harm it a lot more than the West with Russia unlikely to cut off gas supplies to Europe given the long term damage it will do to what is a key export earner for it; and overall US earnings reports have been very strong.
• That said, having not had a decent pullback since January/February US shares (and hence global shares) have become vulnerable to a correction and this may be it. We are also in the weakest quarter of the year for shares seasonally and worries regarding the Fed may be with us for a while yet. However, the absence of investor euphoria, reasonable valuations, easy global monetary conditions and the improving economic outlook suggest that what we are seeing is just a correction, not the start of a major bear market.
• While the Fed will remain an ongoing source of investor nervousness as the case for a rate hike gradually builds, there were no surprises from the Fed’s latest meeting. As expected the Fed announced another $US10bn cut its in quantitative easing program and it now sees less risk of too low inflation and recognises the stronger labour market. However, it still sees significant labour market slack and has not changed its assessment that the Fed Funds rate will remain in its current range for a considerable period after the end of QE. Expect to see a gradual hawkish shift over time, but no rate hike till around mid-2015.
• The justification for tax concessions in Australia – such as negative gearing, the capital gains tax discount, dividend imputation, superannuation – seems to be a hot topic these days. The often put arguments for their removal/curtailment are that the rich get the greatest advantage from them and it would help balance the Budget. Such views are frequently put by Treasury, which, according to Paul Keating, has long hated them. However, the arguments working the other way are more powerful. First, many of the tax concessions are fundamentally justified: negative gearing just allows for the legitimate costs of investing; dividend imputation removes the double taxation of dividends and puts shares on an equal footing with other Australian assets; and superannuation concessions encourage savings for retirement and helps provide patient capital. Second, that they are used so much by the rich is a reflection of Australia’s very high marginal tax rate and the fact that it cuts in at a relatively low income level. Cut the reliance on income tax for revenue and the top marginal tax rates, and the desire to minimise tax via concessions will fall. Removing or curtailing the concessions without cutting income tax rates will just reduce savings and incentive which will work against Australia’s long term growth potential.

Major global economic events and implications

• US economic data confirmed growth has rebounded. June quarter GDP growth rose at a stronger than expected 4% annualised pace after a 2.1% contraction in the March quarter, consumer confidence rose to its highest since October 2007, the Markit services sector PMI remained very strong and jobs data remains solid. However, the US economy is a long way from booming – inventory accumulation contributed 1.7 percentage points to June quarter GDP growth and housing indicators have been a bit mixed. So the recovery continues but I can understand why the Fed is a bit reticent about getting too hawkish. While employment costs rose more than expected in the June quarter, they are still up just 2% year on year which is stuck in the same range as the last few years. So not a lot of inflation pressure here.
• Meanwhile, US June quarter earnings results remain strong. 75% of the S&P 500 has now reported with 76% beating on earnings (against a norm of 63%), 66% beating on sales and earnings growth for the quarter now running around 10% year on year, which is about 5 percentage points above expectations.
• In the Eurozone, economic confidence drifted slightly higher in July consistent with ongoing economic recovery and the unemployment rate continued to drift down to 11.5%, from a high of 12%. That said inflation has fallen to a new cyclical low of just 0.4% year on year highlighting the need for easy monetary policy.
• Japanese data was mixed. Industrial production fell much more than expected in June and the unemployment rate rose slightly but against this real household spending rose more than expected in June, small business confidence rose and the ratio of job openings to applicants rose to its highest since 2002.
• China’s official manufacturing PMI rose further in July adding to confidence that growth is improving.

Australian economic events and implications

• Australian data provided a mixed but ok picture. On the downside a sharp fall in export prices saw the terms of trade resume its slide in the June quarter, resulting in an ongoing headwind to nominal growth and national income. Against this though, while building approvals fell in June, the level remains strong, new home sales rose in June, house prices continue to rise albeit at a more moderate pace than through the last half of last year, the AIG’s manufacturing PMI rose again in July and a weekly Roy Morgan survey indicated that consumer confidence continues to recover from its Budget related hit. What’s more private credit growth picked up further in June driven by a rebound in personal and business borrowing. So while the resources boom continues to fade, evidence continues to build that the economy is rebalancing towards a greater reliance on other sectors.

What to watch over the next week?

• In the US, the Fed’s loan officers survey (Monday) is expected to confirm that lending conditions are favourable, the ISM services index (Tuesday) is expected to show that services sector conditions remain solid and the trade deficit (Wednesday) is likely to be flat. Productivity growth (Friday) is expected to bounce back.
• Having just eased again two months ago the ECB (Thursday) is unlikely to make any changes, but is likely to restate its easing bias and that it is continuing to look into a quantitative easing program.
• Chinese inflation data for July (Saturday) is expected to be benign. Trade data will be released Friday.
• In Australia, as nothing much has changed over the last month the RBA at its Board meeting on Tuesday is expected to leave rates on hold and repeat that a period of interest rate stability remains prudent. Its quarterly Statement on Monetary Policy (Friday) is also likely to express a neutral inclination on rates.
• On the data front in Australia, expect to see June retail sales (Monday) bounce back 0.3% after their fall in May, the June trade balance to remain in deficit (Tuesday), labour force data to show a 10,000 gain in employment leaving unemployment unchanged at 6% and housing finance data (Friday) to show a slight bounce back.
• The Australian June half profit reporting season will start to get underway in the week ahead with 8 major companies reporting including Downer and Rio. Consensus earnings estimates for 2013-14 are for 12% growth led by resources with +28%, banks at +10% and industrials ex-financials at +3%. The combination of the lower iron ore price, the higher $A and the hit to confidence from the Budget in the June quarter suggest a bit of downside risk to consensus estimates for resource and industrial stocks, although the banks are likely to remain strong. Given relatively elevated PEs compared to a few years ago underperformers are likely to be slammed. Most interest is likely to be on outlook statements with resources companies at risk but a bit of upside potential for companies exposed to housing and non-mining construction and retailing. Consensus 2014-15 earnings growth estimates are relatively modest at +5%, with resources at 2%, banks at 4% and industrials at 10%.

Outlook for markets

• Shares have been vulnerable to a correction for a while and so the weakness seen over the last week may have a bit further go, but we continue to see little evidence suggesting we are at or near a major market top. Valuations remain reasonable, particularly if low interest rates are allowed for, global earnings are continuing to improve on the back of gradually improving economic growth, monetary conditions are set to remain easy for some time and there is no sign of the euphoria that comes with major share market tops. In terms of the latter, if anything there is still a lot of scepticism which is a long way from the sort of confidence normally seen when bull markets end. Given all this, any short term dip in shares should be seen as a buying opportunity as the broad trend is likely to remain up. Our year-end target for the ASX 200 remains 5800.
• Bond yields are likely to resume their gradual rising trend over the next six months led by increasing evidence that US growth is picking up pace. This combined with low yields is likely to mean pretty soft returns from government bonds. Cash and bank deposits continue to offer poor returns.
• While the carry trade from ultra-easy money in the US, Europe and Japan risks pushing the $A higher, the combination of soft commodity prices, an increasing likelihood that the Fed will start raising interest rates ahead of the RBA and relatively high costs in Australia are expected to see the broad trend in the $A remain down.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

——–

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.

The post Weekly market & economic update – week ending 1 August, 2014 appeared first on AdviserVoice.

• Share markets rose on mostly good economic data, continued solid earnings results in the US and an absence of additional bad news regarding either Ukraine or the Middle East. This saw Australian shares rise to their highest since June 2008. Bond yields rose but only slightly. Oil and metal prices rose too, but gold fell. The Australian dollar got a boost as Australian June quarter inflation data showing inflation at the top of the RBA’s target range was seen as curtailing the chance of another rate cut.
• The July round of business conditions PMIs provided confidence that the global recovery is on track with the US manufacturing PMI remaining strong at 56.3, the Eurozone composite PMI rising to its equal highest reading for the recovery and China’s HSBC PMI rising to 52 its highest in 18 months. Japan’s manufacturing PMI disappointed though falling back to 50.8. The overall, impression is of continued solid global growth, but not so strong as to invite generalised inflation worries or rate hikes.
• The Chinese share market was perhaps the most interesting over the last week with the continuing run of good economic news resulting in a technical break higher. We have seen a few false breaks in Chinese shares before so it’s premature to get too excited, but with China A shares amongst the world’s cheapest and economic indicators looking better, we continue to see significant medium term return potential from Chinese shares.
• Victory for business friendly Joko Widodo in the Indonesian election is a great outcome for Indonesia, but he lacks the winning margin Modi attained in India and a challenge to the results by the defeated candidate former General Subianto Prabowo, will pro-long political uncertainty. So the outcome does not warrant the sort of re-rating of the Indonesian share market that Indian shares have seen. At least not yet.
• RBA Governor Glenn Stevens provided a reminder of just how important the global policy response to the GFC was in heading off a re-run of the Great Depression. Thankfully policy makers had learned the lessons of the 1930s well and weren’t to be distracted by the disciples of Austrian economics who advocated a do nothing approach. Steven’s also rightly points out that the search for yield and risk taking is “the whole point” to quantitative easing. While this has yet to flow on to risk taking by US businesses, ie investment, with Governor Stevens suggesting this owes much to subdued confidence, I think there are enough indicators to provide confidence it will. This includes the rising trend in US durable goods orders and its strengthening jobs market.
• Comments that Australian home owners with a mortgage will struggle if mortgage rates rise are a bit overblown. We heard similar warnings at the bottom of the last rate cycle in 2009 but didn’t see major problems through the 2009-10 tightening cycle. There are several reasons to expect the same when rates eventually start moving up again. First, just as Australians have sped up principle repayments as rates have come down they will likely slow them as rates go up. In fact debt interest payments are at a ten year low. Second, the household debt to income ratio has been basically flat since the GFC so it’s not the case that Australians have been rapidly taking on more debt. Third, interest rates won’t rise unless household income is also on the rise and this will provide some offset to higher interest rates. Finally, I agree that the rise in household debt ratios over the last twenty years has left households a lot more sensitive to higher interest rates. But this is not new and it explains why the peak in the cycle for interest rates has been trending down. The RBA is well aware of the issue and knows that it doesn’t need to raise rates as much as in times past to have the same impact. So just as the 2010 cash rate peak of 4.75% was below the 2008 peak of 7.25%, the next peak will likely be lower again. Maybe around 4%. At this stage it’s still a bit academic though as the first rate hike is still a way off. But for those home buyers looking for another opportunity to lock in low mortgage rates, the cut in five year fixed rate mortgages to below 5% by major banks on the back of reduced borrowing costs and competitive pressure is good news.

Major global economic events and implications

• US data was mostly good. New home sales disappointed but existing home sales rose solidly, house prices continue to rise, the Markit manufacturing PMI remains strong, jobless claims fell to their lowest since early 2006 and core inflation remained benign at 1.9%. The US economy is on the mend, but the benign inflation result gives the Fed breathing space on interest rates.
• Meanwhile, June quarter earnings remain solid. So far 45% of S&P 500 companies have reported with 77% beating on profits and 66% beating on sales.
• Eurozone July PMIs rose and beat expectations. Services conditions were particularly strong and pushed the composite PMI to its equal strongest for the recovery so far, a level consistent with 1.5% annual growth.
• The slight fall in Japan’s July PMI was disappointing. Meanwhile inflation data remains positive, even allowing for the impact of the sales tax hike.
• The further rise in China’s HSBC manufacturing conditions PMI in July backs up the rise already reported in MNI’s business confidence indicator in telling us that growth has continued to improve. No hard landing here!

Australian economic events and implications

• In Australia, the news that inflation has risen to 3% caused some consternation that there might be a rate hike around the corner. But while inflation at the top of the target range makes it harder for the RBA to cut interest rates again – not that they wanted to anyway – it doesn’t point to a rate hike. First, the rise in the annual rate of inflation reflected strong inflation during the second half of last year, but it has since slowed. Second, outside of housing costs, much of the rise in inflation owes to government decisions. Higher interest rates won’t stop this. Third, inflation is set to fall with the removal of the carbon tax and continuing very low wages growth. Fourth, underlying inflation at 2.8% is basically in line with the RBA’s forecast of 2.75%. And finally, a rate hike will only push the $A even higher. So rates are likely to remain on hold.
• Meanwhile, there was good news on the economy with the weekly Roy Morgan consumer confidence survey rising to pre-Budget levels and a rise in skilled vacancies in June. The former suggests the hit to confidence from the Budget has faded and the latter adds to evidence that forward looking labour market indicators are improving.

What to watch over the next week?

• In the US, the focus will be on the Fed (Wednesday) which is expected to taper its monthly asset purchases by another $US10bn taking them to $US25bn a month, consistent with continued solid economic data. However, most interest will likely be on the tone of the Fed’s post meeting statement which is likely to acknowledge the improvement in the economy but leave the impression the first rate hike is still some time away. My best guess for the first rate hike remains mid next year, but this doesn’t mean financial markets won’t start to worry about it earlier. On the data front, expect a further gain in June pending home sales (Monday), another increase in house prices (Tuesday), little change in consumer confidence (also Tuesday), June quarter GDP data (Wednesday) to show growth bouncing back but only to a 2.9% annualised pace, the July ISM (Friday) remaining solid at around 55.5 and July jobs data (Friday) showing a 225,000 gain in payrolls but unemployment unchanged at 6.1%.
• Eurozone economic confidence measures for July (Wednesday) are likely to remain consistent with continued gradual recovery and inflation (Thursday) is likely to have remained very low.
• In Japan, June data for household spending (Tuesday) and industrial production (Wednesday) will be watched for signs of recovery after the April sales tax induced slump. Jobs data is likely to have remained solid.
• In China, expect to see a further improvement in the official Chinese manufacturing PMI (Friday) for July.
• In Australia, expect to see flat building approvals after a strong rise in May and modest growth in credit (both Thursday). June quarter export prices (Thursday) will likely show a sharp fall reflecting the slump in the iron ore price. Data for new home sales, house prices, the manufacturing PMI and producer prices will also be released.

Outlook for markets

• Shares remain vulnerable to a short term correction, with a potential Fed rates scare at some point being the most likely trigger, but we continue to see little evidence suggesting we are at or near a major market top. Valuations remain reasonable, particularly if low interest rates are allowed for, global earnings are continuing to improve on the back of gradually improving economic growth, monetary conditions are set to remain easy for some time and there is no sign of the euphoria that comes with major share market tops. In terms of the latter if anything there is still a lot of scepticism which is a long way from the sort of confidence that is normally seen when bull markets end. Given all this, any short term dip in shares should be seen as a buying opportunity as the broad trend is likely to remain up. Our year-end target for the ASX 200 remains 5800.
• Bond yields are likely to resume their gradual rising trend over the next six months led by increasing evidence that US growth is picking up pace. This combined with low yields is likely to mean pretty soft returns from government bonds. Cash and bank deposits continue to offer poor returns.
• While the carry trade from ultra-easy money in the US, Europe and Japan risks pushing the $A higher, the combination of soft commodity prices, an increasing likelihood that the Fed will start raising interest rates ahead of the RBA and relatively high costs in Australia are expected to see the broad trend in the $A remain down.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

———

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.

The post Weekly market & economic update – week ending July 25, 2014 appeared first on AdviserVoice.

• Global share markets had a messy week as good economic data, earnings reports and reduced concerns regarding Banco Espirito Santo helped markets only to see them hit by worries about Ukraine, after a Malaysian Airlines flight was downed, and the Middle East, as Israel launched a ground offensive in Gaza. The geopolitical tensions saw bonds rally, oil rise and the $A fall. Australian shares proved relatively resilient though.
• Our thoughts are with those affected by the downing of MH17. I also feel very sorry for Malaysian Airlines and Malaysia generally which has lost two planes this year for reasons that look to be beyond its control.
• It is the time of year for share market corrections (with the September quarter often being soft for shares), but the fall in US and European shares in response to the news regarding Ukraine and the Middle East looks like an overreaction. The downing of the MAS plane won’t necessarily increase the risks around Ukraine, if it has been shot down its likely to have been in error anyway, airlines will simply no longer fly through eastern Ukraine with little impact on international travel and the Israeli/Palestinian crisis has been flaring up for years with no broader consequences. In some ways it is just a continuation of what we have seen all year with occasional geopolitical flare ups which simply constrain markets, but without having a major impact.
• While Fed Chair Janet Yellen’s comments about stretched share valuations in some sectors caused nervousness it’s noteworthy that she also said that in general “price equity ratios and other measures are not outside of historical norms”. Nasdaq stocks remain the main focus of valuation concerns with a PE of 35 times, but this is one third of tech boom levels. Moreover, the forward PE for the broad US share market at 15.5 times is around its long term average and remains well down on its tech boom high of 24.5.
• Should new entrants to the Australian housing market buy or rent? An RBA paper which, after allowing for the costs of owning a house versus renting, concluded that “if house price growth were to be slower than the historical average…then the average home buyer would be financially better off renting” has understandably created much discussion. After nearly two decades of above trend house price growth which has taken Australian housing from being relatively cheap to relatively expensive my assessment has for some time been that we are in for an extended period of range trading around a broadly flat trend for real house prices, which on the RBA’s analysis would point to renting as the way to go. However, I think it’s more complicated than this. First, the RBA’s analysis ignores the forced saving implicit in buying a house which will likely mean that even if house price growth turns out to be sub trend home buyers will likely end up building more wealth than renters over the long term. Second, there is more to buying a house than just a financial decision. I would much rather own than rent. Finally, there is a risk to my sub trend view of house prices if we don’t solve the housing supply shortage.
• Carbon tax no more. It’s a pity that an attempt to put a price on carbon that made sense from an environmental and economic perspective turned into such a political mess. Moving straight to an emissions trading scheme, which would have seen the price of carbon fall by two thirds, would have made more sense. But back to the here and now – just as the introduction of the carbon tax had little macro-economic impact I can’t see its demise having much impact either. It will cause a temporary fall in inflation of around 0.75 percentage points but the RBA will look through this just as it did the temporary boost to inflation in 2012-13. More broadly the sooner the Senate returns to reality – and starts finding savings to replace the Budget cuts it is threatening to reject the better.
• Dividend imputation is not a distortion. The past week saw the interim report of the Financial System Inquiry question whether dividend imputation was creating a bias to invest in domestic equities and adversely affecting the development of the corporate bond market. The trouble is that dividend imputation actually corrects a bias by removing the double taxation of earnings – once in the hands of companies and again in the hands of investors. It also encourages corporates to give decent dividends to shareholders as opposed to irrationally hoarding earnings. Interest on corporate debt never suffered from double taxation as it is paid out of pre-tax corporate earnings. The removal of dividend imputation would not only reintroduce a bias against equities but substantially cut into the retirement savings of Australian investors and lead to lower returns from Australian shares.

Major global economic events and implications

• US data provided more evidence that the pace of growth has picked up with strong underlying retail sales, strong readings for regional manufacturing conditions, okay growth in industrial production and a fall in jobless claims to their lowest since June 2007. Housing starts fell, but the decline was narrowly based and a gain in the NAHB home builders’ index points up. Meanwhile, Janet Yellen’s Congressional testimony maintained a dovish tone, still seeing plenty of slack in the economy, but she does acknowledge the upside risk to interest rates if the economy improves faster than anticipated. Our assessment remains that the first US rate hike is still a while away, but the reality is that the Fed is now in data dependent mode and as growth continues to pick up speculation about rate hikes is likely to cause volatility just as last year’s taper talk did.
• US earnings are coming in better than expected again. We are only 15% through the June quarter earnings reporting season but so far so good with 75% of results beating on earnings and 70% beating on sales.
• Chinese data confirmed that the growth slowdown seen earlier this year is over and suggests mini-stimulus efforts are working. June quarter GDP growth bounced back to 2% quarter on quarter after 1.4% in the March quarter, June growth in industrial production and fixed assets investment accelerated, retail sales growth remained strong at 12.4% and money supply and credit growth picked up. Overall, Chinese growth looks to be on track to come in “around” 7.5% this year. Over the last few years China has had a hard landing scare once a year, but it seems the latest fears regarding a hard landing will also come to nothing.

Australian economic events and implications

• In Australia, an 8.7% surge in dwelling commencements in the March quarter to a record high confirms that a home construction boom is on the way. Meanwhile, the minutes from the RBA’s last Board meeting offered little that was new. While it repeated that a period of stability is the most prudent course, its comments about the mining investment slowdown, fiscal tightening and the high $A suggest it has a slight easing bias.

What to watch over the next week?

• In the US, expect to see an elevated rise in June headline inflation (Tuesday) due to higher energy costs but core inflation remaining around 2% year on year, a modest increase in existing home sales (Tuesday) but a fall in new home sales (Thursday) after an 18.6% gain in May, continued strength in the Markit PMI for July (Thursday) and an ongoing rising trend in durable goods orders (Friday). June quarter earnings results will continue to flow with close to 100 major companies reporting.
• Eurozone business conditions PMIs for July (Thursday) are likely to be consistent with ongoing gradual recovery.
• Japan’s manufacturing PMI (Thursday) will likely show a continued recovery after the fall associated with its sales tax hike. Inflation data will also be released Friday.
• China’s HSBC manufacturing PMI (Thursday) for July is likely to show a further modest improvement to 50.8.
• In Australia, June quarter inflation data is likely to be benign leaving plenty of scope for the RBA to keep the cash rate low at 2.5%. We expect headline inflation of 0.5% quarter on quarter or 3% year on year, with underlying inflation of 0.6% quarter on quarter or 2.6% year on year. Key drivers are likely to be the ongoing increase in tobacco excise and seasonal price increases for health, offset by falls in prices for petrol and food and ongoing weak pricing power on the back of soft final demand. The RBA is unlikely to be fussed by the headline inflation rate being at the top end of the target range as it reflects the inflation surprise of the last half of last year, underlying inflation has been benign over the last six months and wage cost growth remains weak.

Outlook for markets

• Could shares have a correction? Yes. After all we are in the seasonally weak September quarter and there is no shortage of possible triggers – Ukraine is back in the headlines, the Israeli Palestinian dispute is hotting up again, civil war is continuing in Iraq and there is the potential for a Fed rates scare as the US economy continues to hot up. Are we at a major share market top? No. Valuations are not stretched, particularly if low interest rates are allowed for, global earnings are continuing to improve on the back of gradually improving economic growth, monetary conditions are set to remain easy for some time and there is no sign of the euphoria that comes with major share market tops. In terms of the latter if anything there is still a lot of scepticism – about the global recovery and about financial markets – which is a long way from the sort of confidence that is normally seen when bull markets end. Given all, this any short term dip in shares should be seen as a buying opportunity.
• Bond yields are likely to resume their gradual rising trend led by increasing evidence that US growth is picking up pace. This combined with low yields is likely to mean pretty soft returns from government bonds. Cash and bank deposits continue to offer poor returns.
• Although the continuing carry trade from ultra easy money in the US, Europe and Japan risks pushing the $A higher, the combination of soft commodity prices, an increasing likelihood that the Fed will start raising interest rates ahead of the RBA and relatively high costs in Australia are expected to see the broad trend in the $A remain down. RBA jawboning is already making a bit of a comeback.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

———

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.

The post Weekly market & economic update – week ending 18 July, 2014 appeared first on AdviserVoice.

• Share markets retreated over the last week on worries that problems at some European banks might spark a return of its debt crisis and nervousness about a possible correction in the US. Most share markets fell, including in Australia and China. Share market nervousness saw bonds rally, except in peripheral Eurozone countries where Portuguese bank problems weighed. Commodity prices were little changed but interestingly the oil price continued to drift down as worries about Iraq abated and Libyan and Saudi supplies rose. The $A saw a brief bounce higher, but it was short lived.
• It seems there is always something to worry about. Just as investors were getting a little less concerned about oil supply disruptions from Iraq, along comes a scare about problems at European banks. A week ago Austria’s Erste Bank issued a profit downgrade and then the parent company of Portugal’s largest bank Banco Espirito Santo delayed a debt payment. Investors fear this may be a sign of problems at other Eurozone banks, which might require public support leading to renewed budget blowouts. So far there is no evidence of this but the slow recovery in Europe does present risks as does the ECB’s bank stress tests this year. It’s certainly worth keeping an eye on, but several considerations suggest we won’t see a return to the dim dark days of the Eurozone crisis. First, the problems at both Erste Bank and Banco Espirito Santo look to be partly specific to those organisations, eg issues in its Romanian and Hungarian businesses for Erste and a troubled parent and exposure to dodgy Angolan loans for Espirito Santo. Second, the backstop support for Eurozone banks is now huge compared to the situation three or four years ago, eg the ECB’s commitment to supply cheap funding to banks. Third, the rally in Eurozone banks had arguably gotten ahead of itself. Eurozone banks are down 13% from their high in April this year, but from the Eurozone crisis lows in 2011-12 to their April high they rallied 122%, nearly double the 68% gain in Eurozone shares generally. So a correction was inevitable.
• Results from the Indonesian election may take a week or two to be finalised, but most exit polls suggest a win by Joko Widodo, who is the most market friendly and reform oriented of the two candidates, so if he has won it would be a positive for the Indonesian economy and assets. However, it would appear likely to be only a narrow win, so a strong reform mandate may be lacking, unlike in the case of the recent Indian elections.
• The first Budget of the new Modi led Indian Government was a bit of a non-event in terms of announcing dramatic reforms. But it did present a sensible fiscal strategy in terms of reducing the deficit and focussing on productive spending. The Budget should be seen as just a start with significant reform still on the way in India.
• The debacle in Canberra regarding the passage of the Budget and associated policy changes through the Senate is depressing, particularly given the optimism that had come with the demise of minority government last September. There is a risk that it starts to act as a broader drag on confidence in the economy. That said, it would be dangerous to read too much into it at this stage. So far the Australian share market and the $A are rightly ignoring it. And if it results in a softening in some of the harsher measures in the Budget (perhaps funded by a “delay” in the paid parental leave scheme) then it could have a positive impact on confidence.

Major global economic events and implications

• US data continues to point to stronger US growth. Job openings are at their highest since 2007, consumer credit continues to rise, weekly mortgage applications rose, jobless claims fell and a private survey of June retail sales pointed to solid gains. Meanwhile, the minutes from the Fed’s last meeting offered little that was new with the Fed on track to end quantitative easing in October and nothing to change the view that the first rate hike is unlikely till around mid next year. There was some discussion about whether investors had become too complacent on interest rates, but Janet Yellen’s recent comments suggest she was not that concerned. Finally, the June quarter profit reporting season kicked off with a solid result from Alcoa auguring well.
• Japanese data was mostly okay with the June Economy Watchers outlook survey remaining solid, bank lending trending up, a rise in tertiary activity and higher consumer confidence but a sharp fall in machine orders.
• Chinese import and export growth were a little weaker than expected in June, but continue to pick up consistent with better growth. On top of this inflation remains low, posing no constraint to further easing in China.
• The divergence in the state of Asian economies was highlighted in the past week with Malaysia raising interest rates for the first time in three years citing strong growth and inflation risks, whereas the Bank of Korea left rates on hold but with a clear easing bias after revising its growth forecasts down. Korea seems to be more of a special case though with the ferry accident earlier this year having a negative impact on spending.

Australian economic events and implications

• Australian data was rather messy. Consumer confidence rose in July but only slightly and is yet to fully recover its Budget related slide, but against this business confidence is running slightly above average. Employment also rose by more than expected in June but jobs growth is still not enough to bring unemployment down, with it bouncing back to the top of the 5.8 to 6% range it has been in for the last nine months. The good news though is that leading employment indicators such as ANZ job ads and the hiring component of the NAB survey are pointing to stronger jobs growth ahead. There was also good news for the construction sector with the AIG’s construction PMI rising strongly in June. While housing finance slipped in May adding to evidence of a welcome moderation in momentum in the home buying market, it remains at a high level.
• With interest rates set to remain low and on hold probably into next year and the Budget likely to be softened to get it though the Senate, its likely that consumer confidence will gradually improve over the months ahead.
• According to Australian Property Monitors capital city rental growth over the year to the June quarter ranged between -6.6% (in Perth) and +5.6% (in Melbourne. The point though is that with dwelling prices up around 10% over the same period rental yields are continuing to fall.

What to watch over the next week?

• In the US, a key focus will be Fed Chair Janet Yellen’s Congressional testimony starting Tuesday. Its unlikely she will waver much from the message following the June Fed meeting which was basically that the economy is improving allowing continued tapering but that monetary tightening is still a considerable time away given slack in the economy. She may elaborate a bit on the risks around inflation and rates and the Fed’s exit strategy. On the data front, expect a 0.6% gain in June retail sales, a 0.3% rise in June industrial production (Wednesday), a further rise in the NAHB homebuilders conditions index (Wednesday)  and gains in housing starts and permits (Thursday). Producer price inflation data will also be released.
• The US June quarter earnings reporting season will start to hot up. The consensus is for earnings growth of 6% year on year and sales growth of 3%. Given the downgrade from 8% three months ago and a high level of negative profit warnings it’s likely that earnings growth will come in stronger than this.
• Chinese activity data released Wednesday is expected to confirm a pick-up in growth, after the slowdown in the March quarter. June quarter GDP growth is expected to grow 1.8% quarter on quarter (after 1.4% QOQ) in the March quarter, leaving annual growth at 7.4%. June industrial production is expected to pick up to 9% year on year, with growth in retail sales expected to remain unchanged at 12.5%.
• In Australia, the minutes from the last RBA Board meeting (Tuesday) are likely to express a more dovish bias than seen in the post meeting statement consistent with the more dovish tone seen in the previous minutes and in Governor Steven’s recent speech. Data for dwelling starts (Wednesday) will likely show a further rise.

Outlook for markets

• Could shares have a correction? Yes. As always there is no shortage of possible triggers with Eurozone bank issues back in focus and the potential for a Fed rates scare as the US economy continues to hot up. Are we at a major share market top? No. Valuations are not stretched, particularly if low interest rates are allowed for, global earnings are continuing to improve on the back of gradually improving economic growth, global and Australian monetary conditions are set to remain easy for some time and there is no sign of the euphoria that comes with major share market tops. In terms of the latter if anything there is still a lot of scepticism – as evident in headlines about capital markets being out of step with reality (Financial Times) and markets being so high that the air is thin (Wall Street Journal) – which is a long way from the sort of confidence that is normally seen when bull markets come to an end. Given all, this any short term dip in shares should be seen as a buying opportunity. Our year-end target for the ASX 200 remains 5800.
• Bond yields are likely to resume their gradual rising trend led by increasing evidence that US growth is picking up pace. This combined with low yields is likely to mean pretty soft returns from government bonds. Cash and bank deposits continue to offer poor returns.
• While the continuing carry trade from ultra easy money in the US, Europe and Japan risks pushing the $A higher in the near term (potentially up to $US0.97), the combination of soft commodity prices, an increasing likelihood that the Fed will start raising interest rates ahead of the RBA and relatively high costs in Australia are expected to see the broad trend in the $A remain down. RBA jawboning is already making a bit of a comeback.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

———-

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.

The post Weekly market & economic update – week ending 11 July, 2014 appeared first on AdviserVoice.