• The correction in shares continued over the last week. While dovish minutes from the Fed’s last meeting provided mid-week support it was short lived as nervousness about growth in Europe and the broader global growth outlook, along with worries about Ebola weighed. This saw most share markets fall. From their highs last month US shares have fallen 4%, global shares are down 5% and Australian shares are down 8%. The Australian share market has effectively led the global share markets on the way down reflecting falling iron ore prices, fears about Australian banks needing to raise more capital and the tendency for foreign investors to stay away as the $A falls. Reflecting falling global inflation expectations and safe haven demand bond yields generally fell.  The $US had a fall from overbought levels and this saw the $A bounce but commodity prices were mixed with oil prices down sharply but metal prices up slightly. World oil prices are now down 20% since the problems with IS in Iraq first hit the global headlines a few months ago.
• A downgrade to the IMF’s outlook for global growth is clearly weighing on sentiment. The downgrade was only modest taking its global growth forecasts down by just 0.1% to 3.3% for 2014 and down by 0.2% to 3.8% for 2015, but it nevertheless highlighted the softness in global growth momentum outside the US. However, it was hardly new news, as weakness in Europe, Japan, Brazil and Russia is well known, and is just a repeat of the pattern seen in the last few years where stronger global growth is forecast in the year ahead only to be revised down as we get closer to it. In some ways the uneven, “not to hot, not too cold” global economic expansion is not bad as it means we remain a long way from overheating, higher inflation and aggressive monetary tightening.
• The minutes from the last Fed meeting clearly recognise this with the Fed highlighting that its move towards rate hikes is not on auto pilot but dependent on how the economy performs and that it will allow for the dampening impact on US growth and inflation from foreign weakness and the strong $US. If anything the timing of the first US rate hike, which we have been expecting to come in the June quarter next year, may be getting pushed back a bit (again). This is particularly so with US inflation remaining below target and bond yields falling on the back of falling inflationary expectations.
• In Australia, the RBA remained on hold again as expected with its post meeting statement coming across as a bit dovish with it still seeing the Australian dollar as historically high despite recent falls, domestic demand remaining patchy, modest wages growth seen as keeping a lid on inflation and relatively sanguine comments regarding house prices. Given this the RBA looks set to leave rates on hold well into next year, with no hikes likely till after the Fed starts to hike. This is likely to mean no move until the second half next year. Rates have now been on hold at 2.5% for 15 months, which is still well below the 20 month record when rates were left at 7.5% from December 1984 to July 1996.

Major global economic events and implications

• US economic data was light on but okay. Labour market indicators were good with job vacancies up in August and weekly unemployment claims continuing to fall. Meanwhile, the September quarter earnings reporting season has kicked off with Alcoa, Costco and Pepsi all beating expectations. Market expectations for 6% year on year earnings growth for the year to the September quarter are likely to prove too conservative yet again.
• Eurozone economic data has been poor with sharp falls in German industrial production and factory orders and weak exports from both Germany and France with ECB President Mario Draghi under pressure to do more as he reiterated that the Eurozone recovery is losing momentum.
• The Bank of Japan left monetary policy unchanged, continuing to pump out cash at a faster rate than the Fed ever did, but mixed economic data – with a fall in economic sentiment but gains in machine/tool orders – leaving it under pressure to do even more.
• Chinese non-manufacturing PMI’s fell in September, but remain okay and ongoing mini-stimulus measures helped buoy the Chinese share market some more, which is now up 12.9% this year. In fact, after performing poorly for several years Chinese shares this year are now one of the world’s strongest this year.

Australian economic events and implications

• In Australia, the confusion around monthly jobs data was heightened as the ABS concluded its seasonal adjustment process had distorted recent jobs data and so switched to reporting original or unadjusted data. While this has led to a mini-furore the monthly jobs data at the best of times has a big noise element and the ABS has long urged us to focus on the trend data. Maybe we would be better off if it just published quarterly jobs data – less time would be wasted analysing noisy confusing data!  Statistical noise aside the basic picture is of modest jobs growth and a gradual rise in the unemployment rate – all of which is consistent with the RBA’s decision to leave interest rates on hold at record lows. The good news is that forward looking jobs indicators like job ads and hiring plans in the NAB survey, point to stronger growth at some point ahead. Other data was mixed with softer than expected housing finance, but a record high reading for the AIG’s construction conditions PMI and another very low inflation reading from the TD Securities Inflation Gauge for September.Out of interest the ABS also confirmed what many have long suspected – that the share of housing finance going to new home buyers is way understated! So maybe we don’t have a first home buyer crisis afterall.

What to watch over the next week?

• In the US, the main focus is likely to be on a speech by Fed Chair Yellen (Friday) for anything new on the monetary policy outlook but she is likely to simply confirm that the timing of interest rate hikes remains dependent on the state of the economy and right now there remains significant slack in the labour market. On the data front: expect a modest pullback in September retail sales (Wednesday) as payback for strong gains seen in August, but underlying retail sales growth to remain solid; benign producer price inflation (Wednesday); solid growth in industrial production (Thursday) and continued strong readings in the New York and Philadelphia Fed manufacturing conditions surveys (due Wednesday and Thursday respectively); a further gain in the NAHB home builder index (Thursday); and a rebound in housing starts and permits (Friday). The Fed’s Beige Book will also be released.
• Chinese export and import growth for September (Monday) is expected to show an acceleration but  inflation for September (Wednesday) is expected to have fallen to just 1.7% year on year with producer price falls intensifying highlighting significant potential for more monetary easing. Credit and money supply growth is likely to show a modest improvement after recent weakness.
• In Australia, the NAB business survey (Tuesday) will be watched to see if business conditions and confidence have remained around the reasonable levels seen in August and the Westpac consumer confidence survey (Wednesday) will be watched for a bounce after the weakness seen in September. June quarter data for dwelling starts ((Wednesday) are likely to show further strength.

Outlook for markets

• The weakness we have seen in shares over the last month could well have further to run in the short term. While Australian shares have led with a fall of 8%, the pull back in US shares of just 4% to date is quite modest and nervousness is likely to remain in the near term regarding the Fed’s probable ending of quantitative easing later this month, the upcoming bank stress test results in Europe, Ebola and various geopolitical issues. We are also still at the tail end of a messy time of year for shares from a seasonal perspective.
• However, this is still likely to be just a normal correction rather than the start of a new bear market. Share valuations are already pushing 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, 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 starting to get 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.  Getting the end of QE3 over with, seeing the ECB’s bank stress test results and the ECB start up its QE program (all due later this month) are likely to help in this regard.
• Low bond yields will likely mean soft 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.
• In the short term the Australian dollar has fallen a bit too far too fast (just as the $US has risen too far to fast), so a short covering bounce could well emerge over the next month or so. That said the broad trend in the $A is likely to remain down reflecting soft commodity prices, the likelihood the Fed rate hikes 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 10 October, 2014 appeared first on AdviserVoice.

• Share markets had a rough week weighed down by a combination of worries about the Fed, tough action against US companies seeking to reduce their tax by relocating outside the US, worries about Chinese growth, geopolitical concerns and worries about the loss of breadth in the US share market rally. The poor global lead, falling iron ore prices and the retreat of foreign investors to the sidelines saw the Australian share market give up its gains for the year. Weakening share markets saw bonds rally across the board suggesting in part that investors fear that talk of US rate hikes is premature. The outlook for relatively tighter monetary policy in the US versus other major regions saw the US dollar continue to rally, leaving it up nearly 7% over the last three months, and this is also weighing on commodity prices. The falling iron ore price and the rising $US saw the $A continue its slide.
• Geopolitical threats are continuing. While the global threat from the Ukraine conflict seems to be receding a bit, the conflict with IS in the Middle East is hotting up bringing with it the threat of global terrorist activity. So far global oil supplies are not under threat, with the oil price running below the levels when IS in Iraq first started hitting the headlines. But increasing prospects for the deployment of ground forces in Iraq by the US and its allies and talk of the terrorist threat are weighing on investor confidence. Terrorist attacks are horrible in terms of their human consequences and there is no doubt that an IS terrorist attack in a western country would be taken badly by share markets. But the experience with various Al-Qaida related attacks (9/11, Bali Bombing, 2005 London bombings, etc) is worth recalling: after an initial negative impact share markets bounced back as it was clear that there would not be a major economic impact and it seemed the effect on markets weakened as the terror threat continued. It only took just over a month for the US share market to recover from its 12% post 9/11 slump and it took the UK share market 1 day to bounce back from its 1.3% fall on the day of the July 2005 London bombings.
• In Australia, the Reserve Bank’s Financial Stability Review expressed concern that the housing market is becoming too speculative and that if left unchecked poses risks to the broader economy for when the property cycle turns back down. As a result APRA has stepped up its surveillance of the banks and given the desire to avoid a rate hike at this point the RBA is discussing with APRA further steps that may be taken to ensure sound lending practices are maintained, particularly with respect to property investors. The focus looks like it may be on tougher capital requirements and interest rate tests banks apply when assessing new loans rather than restrictions on loan to valuation ratios. It’s likely that if the property market does not soon cool an announcement could be made in the next few months. To the extent that the use of macro-prudential controls might delay the first rate hike further into 2015, it could be good news for existing home borrowers.
• The term “macro prudential controls” is really just the latest buzzword for the failed credit rationing policies used prior to the 1980s. The RBA would be well aware of the risk of unintended consequences – eg, the potential impact on first home buyers many of whom are investors these days and in forcing borrowers into the shadow banking system – but it no doubt feels such controls are better than raising interest rates right now.
• The Australian dollar is continuing to slide helped by an ascendant US dollar, the continuing slide in the iron ore prices (now down 41% year to date) and the possibility that the use of macro-prudential controls to slow the housing market will further delay the first rate hike in Australia. Comments by Reserve Bank of NZ Governor Wheeler that the level of the $NZ was “unjustified and unsustainable” also helped as they apply just as much to the level of the $A. I remain of the view that by year end the $A will have fallen through the January low of $US0.8660 on its way to around $US0.80 over the next year or so. A lower $A will help rebalance the economy.

Major global economic events and implications

• US economic data remains mostly strong. While existing home sales surprisingly fell in August new home sales surged to a six year high, the Markit PMIs for September remained solid and durable goods orders continue to trend higher. While Fed officials are continuing to provide mixed messages on the timing of rate hikes its noteworthy that a couple of hawks will not be voting members at the Fed next year and so their calls for an earlier move by the Fed should be ignored. Our view remains that the Fed won’t start raising rates till around the June quarter, but the 7% gain in the $US since June has probably not been lost on Janet Yellen who would be thinking its delivering a de facto monetary tightening.
• Eurozone PMIs continued to edge down in September leaving them at levels consistent with only modest growth and ECB President Draghi described the recovery as losing momentum. There was a slight improvement in money supply and credit momentum, but not enough to allay the mounting pressure on the ECB.
• A slight fall back in Japan’s manufacturing conditions PMI for September was disappointing but leaves in place a gradual recovery after the April tax hike induced fall. Japanese core inflation excluding the impact of the tax hike is continuing to run around 0.5% year on year, which is better than deflation but not much of a buffer really. The latest leg down in the value of the Yen should help provide a further boost to inflation though.
• While Chinese officials continue to indicate there won’t be any major policy stimulus, it’s worth noting similar comments were made earlier this year before various mini-stimulus measures were introduced. An unexpected slight rise in the HSBC flash PMI for September helped relieve Chinese growth fears a bit.

Australian economic events and implications

• In Australia, job vacancies fell slightly over the 3 months to August according to the ABS but this followed  a 5.3% gain over the previous six months and skilled vacancies rose in August for the 11^th month in a row so the basic picture remains one of forward looking indicators pointing to stronger jobs growth ahead.

What to watch over the next week?

• In the US, the main focus will be on the ISM manufacturing and services indexes (due Wednesday and Friday respectively) which are both expected to remain strong and employment data (Friday) which is expected to show a 210,000 gain in payrolls for September and unemployment unchanged at 6.1%. Consumer spending data (Monday) is also expected to show that the Fed’s preferred inflation measure remained benign with a fall to 1.4% year on year.
• In the Eurozone, business confidence data (Monday) is likely to have weakened a bit further and September inflation (Tuesday) is likely to be just 0.3% year on year. Despite this, the ECB (Thursday) is unlikely to announce further monetary easing but may provide details of its proposed QE program involving asset backed securities.
• Japanese data for jobs, household spending, industrial production, labour cash earnings and housing starts due Tuesday will be watched for signs of further improvement following the impact of the April sales tax hike, but the September quarter Tankan business survey (Wednesday) is likely to have weakened slightly.
• In China, the official PMI (Wednesday) is likely to be little changed from the 51.1 reading for August.
• In Australia, given the RBA’s concern about the property market, credit data (Tuesday) and RP Data house price figures (Wednesday) for September may see greater than normal interest. Expect to see overall credit growth remaining modest but interest will be on whether growth in credit going to property investors accelerated from the roughly 10% annualised pace seen over the last few months. RP Data is expected to show that house price gains remained strong in September. Meanwhile, expect a modest gain in retail sales (Wednesday), a renewed deterioration in the August trade deficit (Thursday) and solid building approvals (also Thursday).

Outlook for markets

• Shares remain at risk of further short term weakness particularly ahead of the end of US quantitative easing next month, the US mid-term elections in November and as we are still in a seasonally weak part of the year for shares. Australian shares are also vulnerable in the short term to further falls in the iron ore price and as foreign investors stay on the sidelines as the $A falls.
• However, this is likely to be nothing more than a healthy correction, allowing shares to let off a bit of steam, and should be seen as a buying opportunity as the cyclical bull market in shares likely has further to go. 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, global earnings are continuing to improve on the back of gradually improving economic growth, global monetary conditions are set to remain easy and there has been no sign of investor euphoria.
• Although the falling $A is initially a drag on the Australian share market as foreign investors retreat to the sidelines, after a while it will start to become a source of support as it flows through to upwards revisions to earnings expectations. Roughly speaking each 10% fall in the value of the $A boosts company earnings by 3%.
• Low bond yields will likely mean soft returns from government bonds, particularly as we continue to edge closer to the start of a gradual interest rate tightening cycle in the US.
• The combination of soft commodity prices, the likelihood the Fed rate hikes before the RBA and relatively high costs in Australia are expected to see the broad trend in the $A remain down. 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 26 September, 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.

• 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.

• Global share markets generally rebounded over the last week as a dovish Fed and  solid economic data offset continuing uncertainty regarding Iraq and Ukraine. Australian shares also had a good week but Chinese shares were dragged down by worries about new share IPOs. Bond yields were flat to down helped by indications that the Fed sees lower long term interest rates, but yields backed up a bit in Spain and Italy. While oil was little changed, gold and metal prices had a bit of a rise. The $A was essentially unchanged.
• The message from the Fed’s latest meeting was supportive of both bonds and equities. While our concern for some time has been that there will be some sort of inflation/Fed rates scare this year – much like last year’s taper scare – at this stage it still seems a while off. While the Fed is more confident on the growth and unemployment outlook, it doesn’t look to be too fussed by the recent rise in CPI inflation because its preferred measure of inflation is running somewhat lower and the CPI may have been boosted by noise and it would clearly like to see broader measures of spare capacity in the labour market improve. As a result, Janet Yellen continues to point out that below normal levels for the Fed Funds rate may be warranted even after inflation and unemployment have returned to target. What’s more the Fed meeting participants revised down their median long run Fed Funds rate level by 0.25% to 3.75%. So understandably both bonds and equities rallied.
• However, it’s not necessarily all smooth sailing. Fed meeting participants did creep up their interest rate expectations for 2015 and 2016 and as Janet Yellen points out the key will be what happens to the data going forward. Our view remains that the first Fed rate hike is still 9-12 months away, but we are likely to see more focus on this in the months ahead particularly if US economic data remains solid. With US (and global) bond yields a lot lower than they were at the start of the year there is a bit of complacency on this front. So a US inflation/rates scare could still be a source of market volatility in the months ahead.
• Ukraine and Iraq are clearly bubbling away as risks but not posing major threats, at least not yet. The conflict in Iraq is still building with the US committing military advisers and considering air strikes, but our assessment remains that it will have to get a lot worse before it becomes a major threat. The conflict is currently in the north of Iraq but 2.1 million barrels per day of its 2.3 mbd of oil exports comes from the south, OPEC has sufficient spare capacity to meet any shortfall from Iraq and US shale oil production means that the US is less affected than in times past. Historically the oil price needs to double within 12 months and right now we are a long way from that.

Major global economic events and implications

• US economic data provided more evidence that growth has bounced back after the first quarter soft patch, with a solid gain in May industrial production, strong readings for the New York and Philadelphia regional manufacturing conditions surveys, a decline in jobless claims, another rise in the Conference Board’s leading index and an increase in the NAHB home builders’ conditions index. Housing starts fell in May but this was after a very strong gain in April and permits to build standalone homes rose strongly. One concern though was a stronger than expected gain in CPI inflation with both core and headline inflation running around 2% on a year ended basis and around a 3% annual rate over the last three months. While at this stage the Fed is not too concerned as its preferred inflation measure is a bit weaker, the risk of a mini-inflation/Fed rates scare in the next six months is worth keeping an eye on.
• Chinese house prices down, but another sign that growth is stabilising. Chinese house prices fell an average 0.1% in May, their first decline in over two years. However, so far the property downturn is little different to those seen around 2008 and 2011 and it should also be remembered that this is what the Government has been hoping to achieve. Meanwhile, a second consecutive gain in the MNI business indicator in June adds to confidence that growth in China has bottomed and that the various mini stimulus measures of the last few months are getting traction. Meanwhile, Premier Li indicated that “smart and targeted regulation” will ensure that the 7.5% growth target for this year will be met.

Australian economic events and implications

• It was a light week on the economic news front in Australia with a marginal rise in new vehicle sales and the Westpac leading index and the minutes from the RBA’s last meeting confirming its rates on hold stance. The minutes did express a degree of uncertainty as to whether low interest rates would be enough to offset declining mining investment and fiscal consolidation but this should be interpreted as supporting the case for rates to remain on hold at current low levels rather than signalling new dovish leanings on the part of the Bank. Meanwhile, comments by RBA Assistant Governor Kent regarding spare capacity in the labour market and falling unit labour costs highlights the RBA’s comfort in the benign outlook for inflation.
• Australia’s population rose another 1.7% last year to 23.3 million, which is above its long term average rate of population growth highlighting that this remains a strong force for growth in Australia. This is both via a rising labour force and rising demand, particularly in terms of the demand for housing. Australia’s strong population growth stands in contrast to parts of Europe and Japan where populations are flat or falling.

What to watch over the next week?

• Globally, its PMI day again on Monday with June business conditions PMIs set to be released in China, the Eurozone and the US and the news is likely to be reasonable. The further increase in the June MNI business indicator in China points to a further slight rise in the flash HSBC PMI, the Eurozone PMI’s are expected to stay around the 52-53 level with some possibility of a boost from the ECB’s latest easing measures and the Markit PMI in the US is expected to remain around 56.
• In addition in the US, expect to see further gains in existing home sales (Monday), new home sales and house prices (all Tuesday), a slight rise in consumer confidence (Tuesday), solid underlying durable goods orders (Wednesday) and a rise in the Fed’s preferred inflation indicator (ie the core private consumption deflator) to 1.6% year on year for May (Thursday). March quarter GDP growth (Wednesday) is expected to be revised down further to -1.8% annualised, but this should be seen as old news given the improvement seen in a range of indicators in recent months.
• Japanese data to be released Friday will be watched for a bounce back in consumer spending after the tax related slump in April and for continued strength in the jobs market. National inflation is expected to have increased to 3.7% year on year but this has also been affected by the sales tax hike.
• In Australia it will be a light week on the data front with only data for skilled job vacancies (Wednesday) and overall job vacancies (Thursday) due for release. Both will be watched closely for Budget related impacts.

Outlook for markets

• Shares remain vulnerable to a mid-year correction, just as we have seen in each of the last four years now. Iraq, Ukraine and the risk of an inflation/Fed rate hike scare in the US at some point are all risks. However, in the absence of a global monetary shock as we saw in each of mid 2010, 2011 and 2013 and with shares having been in a bit of a stealth correction through the first part of this year, any pull back may well be mild. In any case the broad trend in shares is likely to remain up. Share market fundamentals remain favourable with reasonable valuations, global earnings improving on the back of rising economic growth and monetary conditions set to remain easy for some time. So any dip should be seen as a buying opportunity. Our year-end target for the ASX 200 remains 5800.
• Bond yields are likely resuming their gradual rising trend as its becoming increasingly clear that US inflation has bottomed and 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 boost to the carry trade from the ECB and continued dovishness from the Fed risk pushing the $A higher in the short term the combination of soft commodity prices and relatively high costs in Australia are expected to see the broad trend in the $A remain down over the medium term. RBA jawboning is likely to return if the $A goes up too much further.

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 20 June, 2014 appeared first on AdviserVoice.

“The third slug of monetary stimulus from the US Federal Reserve Bank came just days after the European Central Bank (ECB) delivered on its promise in July to do ‘whatever it takes’ and after outgoing Chinese premier, Wen Jiabao, turned on the infrastructure spending taps again.”

Mr Stevenson notes: “The latest quantitative easing (QE3) from the Fed is different from its forerunners in two key ways: it is open-ended as to size and duration. There is no ceiling to the stimulus which will continue ‘for a considerable time after the economic recovery strengthens’.

“It is clear which element of the Fed’s dual mandate matters now – growth is the target and if the price is inflation, well, so be it.

“Even if you believe that the long-term impact of all this shock and awe must be negative, it would be a bold call in the short run to stand in front of the central bank juggernaut.”

He suggests there are five ways in which investors might ride the QE wave.

1 –“First, they should have exposure to equities. According to Credit Suisse, US shares rallied by 10-15% in the first few weeks of previous bouts of quantitative easing, but rolled over again within a few weeks of the end of the stimulus.

“The open-ended nature of the latest round offers the prospect of the rise without the fear of the imminent peak. Shares have tended to rise in an environment of rising inflation expectations until they reach 4% or so. We are some way off that point yet.

“Rising inflation expectations will also increase investors’ appetite for cheap real assets, the most obvious example of which is US property. The fact that the Fed is pouring money directly into mortgage-backed securities at a time when the US housing market has already turned the corner is a very bullish signal for the sector. US funds are the best way of playing this for a UK investor, although some companies on this side of the pond, such as building materials group Wolseley, could benefit too.

2 – “Favouring the US market, my second strategy, is not just about backing a recovering housing market though.
The Fed’s move this week is a clear indication that it will do what it must to offset any tightening in tax and spend as the US belatedly addresses the fiscal cliff after the presidential election.

3 – “Thirdly, investors should continue to favour income-generating investments. The whole point of QE is to suppress bond yields and to keep the real, inflation-adjusted cost of servicing government debt low, and preferably negative, for as many years as it takes to get the ship back on an even keel.

“This so-called “financial repression” endured for a decade or more after the Second World War and it was many years then before the chickens came home to roost in the form of 1970s stagflation.

“Sustainability of dividend is the key because there are plenty of high-yield ‘traps’ waiting for the unwary investor, but there is no shortage of blue-chips offering reliably high and growing dividend streams.

4 – “Fourth, I think there is more to go for with gold. After a disappointing year or so – even more so for gold producers, which have under-performed the metal itself – the response of the gold price to expectations for and the reality of more quantitative easing points to further strength.

“With no income stream, I don’t really view gold as an investment but, as an insurance policy against dollar debasement and inflation, it is worth its place in anyone’s portfolio.

5 – “Finally, I think the inflationary endgame looks ever more likely as the Fed’s determination to re-kindle growth hardens. Inflation-linked bonds are an obvious hedge and, within the equity market, I would look at shares in companies whose returns have a regulatory link with rising prices such as utilities and some infrastructure companies.”

Mr Stevenson adds: “Investors’ tendency to buy the rumour and sell the news might suggest that markets could consolidate after the announcements of the past couple of weeks. But I wouldn’t count on it.”

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment. Prior to making an investment decision, retail investors should seek advice from their financial advisers. Investors should also obtain and consider the Product Disclosure Statements (“PDS”) for any Fidelity fund mentioned in this document. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise.  2012 FIL Responsible Entity (Australia) Limited.  Fidelity, Fidelity Worldwide Investment and the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited.

The post Five ways investors can ride the QE3 stimulus appeared first on AdviserVoice.

But because the financial crisis triggered no ordinary recession, it now seems logical that this is turning out to be no ordinary recovery. Key economies were quickly out of the blocks – notably Germany and the US – and gave comfort to investors looking for signs of a quick turnaround. But they have since lost virtually all momentum after stumbling at the third or fourth hurdle.

Many people now expect some developed economies to slip back into recession while some now argue that we never left it at all. Considering that none of the major developed economies have regained the level of output they reached before the crisis began, you can see their point.
But it is not all bad news and there is a growing sense among some investors that despite all the doom and gloom, perhaps even because of it, this is a great opportunity to take a contrarian position and capitalise on some particularly attractive valuations.

So where are the opportunities for investors who are swimming against the tide? First on the list should be companies that remain able to grow sales and earnings in spite of the lower growth environment. There are plenty of companies capable of doing this across a real cross-section of the market.

Finally, avoiding weaker sectors is often as profitable as buying the strongest. So if your base case is that the recovery never really put down sustainable roots in the first place, you would have been surprised at the pace of recovery in the mining and other cyclical industrial stocks over the past two years. These tend to perform better late in the economic cycle and rely on conviction in the strength of the recovery to outperform.

The recovery has threatened to be weak and bumpy for some time, but confidence in demand from emerging markets overcame concerns about fragility in developed markets. The oil price, for example has remained relatively high, so too has copper and other important commodities. This pushed margins to the upper end of their historic range and valuations in the sector to a peak of 60-year highs on the price-to-book measure.

There is little doubt that the long-term growth in demand for finite commodities remains in tact as emerging markets expand, but the short-term expectations must now be lower as a reflection lower of rates of growth in many countries in the developed world.

Rarely has the market remained this volatile for this long but the last time it happened was so recently, many investors are accustomed to it. This does not mean that all investors behave rationally, however. This correction is an understandable reaction to the changing environment and has revealed some interesting opportunities for investors with the nerve to deny their instincts to remain with the crowd on the sidelines.

The volatility is likely to continue, but could provide the foundations for building future profit.
This document is issued by FIL Investment Management (Australia) Limited ABN 34 006 773 575, AFSL No. 237865 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment. Prior to making an investment decision, retail investors should seek advice from their financial advisers. Investors should also obtain and consider the Product Disclosure Statements (“PDS”) for any Fidelity fund mentioned in this document. The PDS is available at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is Perpetual Trust Services Limited (“Perpetual”) ABN 48 000 142 049. Perpetual is not the publisher of this document and takes no responsibility for its content. Reference to ($) are in Australian dollars unless stated otherwise. 2011FIL Investment Management (Australia) Limited.   Fidelity, Fidelity Worldwide Investment and the Fidelity Worldwide Investment logo and currency F symbol are trademarks of FIL Limited.

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