• Share markets mostly pulled back over the last week as worries about the Fed, talk of tougher capital requirements for US banks and new trade sanctions over Ukraine weighed. Japanese shares were an exception globally with the fall in the Yen to a six year low boosting confidence. Australian shares were weighed down by the weak global lead and the ongoing fall in the iron ore price. Bond yields mostly rose though on the back of Fed concerns and commodities were generally soft not helped by a stronger US dollar.
• After being wrong on the $A all year (I expected it to fall, but it went up), it’s now going in the right direction again thanks to a combination of a resurgent $US as the Fed edges closer to an eventual rate hike and continuing weakness in commodity prices as highlighted by the plunging iron ore price. This is being reinforced as the $A has broken through technical support including its 200 day moving average. The unwinding of net long speculative positions in the $A is likely to add to its downwards momentum. My view remains that it’s on its way ultimately to around $US0.80 or even a bit below which is a level that would neutralise the relatively high cost and price base in Australia compared to the US. The resumption of the downtrend in the $A may not be so good for us as consumers (as import prices will have another leg up), but it will provide a great shot in the arm for trade exposed industries, such as manufacturers, tourist operators and higher education institutions, which is just what the economy needs. For investors, it means having a greater exposure to foreign currencies (notably the $US) via eg unhedged global shares or short $A positions (which we have done in our funds).
• Scottish independence madness – what are they drinking? On the geo-political risk front attention is turning to the Scottish independence vote to be held August 18. While most polls favour the No vote it’s a close call. A move to independence for Scotland (which is 9% of UK GDP, 8% of UK population) would ultimately see it worse off than staying in the UK as North Sea revenues are in decline, its population growth is weak, its budget deficit would be larger and the transition would involve huge risks for its large financial sector (which accounts for 16% of Scottish employment) as it may not retain the protection of the Bank of England. For these reasons a No vote makes sense and is our base case, but of course this is about more than economics, as some things are I guess!
• A Yes vote would have two significant implications. First it would raise the level of uncertainty around UK and particularly Scottish assets. This is because it would raise a whole bunch of issues around North Sea oil and gas revenue, whether Scotland would take its share of the UK’s public debt, whether it will be able to retain sterling as its currency and the BoE as its central bank and lender of last resort. But of course the UK is no longer a major driver of global growth so don’t expect a major threat globally here. The second and more significant implication is that it could encourage Catalonia’s push for independence from Spain (with a vote on this scheduled for November 4, although this is not officially recognised by the Spain) which could frighten investors in Spanish bonds and raise fears, albeit I think short lived, regarding the Euro. This is the bigger issue to keep an eye on.
• While shares are vulnerable to a correction over the seasonally weak September/October period, the latest Westpac/Melbourne Institute consumer sentiment survey for September provided a reminder that we are still a long way away from the sort of optimism towards shares that we normally see at major share market tops. Bank deposits and paying down debt continue to be seen as the wisest place for savings with less than 10% of those surveyed seeing shares as the wisest place. In 2000 just before tech wreck the latter peaked at 34%.

Major global economic events and implications

• US economic data was generally strong, adding to concerns about an earlier than expected Fed rate hike. Consumer credit is in a solid rising trend, small business optimism rose further, although job opening and hiring rates did not rise further they remained at high levels and health spending data points to an upwards revision to June quarter GDP growth. That said as has been the case for a while it’s not all strong with the rate at which people are quitting jobs (a favourite indicator of Janet Yellen) remaining sub-par and applications for mortgages to purchase properties remaining weak. Meanwhile the US budget deficit continues to shrink – down 22% for the first 11 months of the current financial year on 7% plus revenue growth and virtually stagnant spending growth.
• Japanese data presented a mixed picture but one still consistent with a return to growth in the current quarter. Consumer confidence dipped and an index of tertiary activity was flat but against this the Ministry of Finance’s business survey rose to near pre sales tax hike levels, machinery orders rose strongly and the Manpower employment index rose further. What’s more the Yen fell to 107 (per $US) it’s lowest in six years.
• Chinese August data suggests that the latest soft patch in economic data is continuing with a fall in imports and another slowdown in money supply and credit growth. However, continued strength in export growth will help GDP growth and Premier Li indicated that growth remains on track for “about 7.5%” this year and that the Government will continue with “targeted easing”. Benign inflation readings for August, with non-food inflation at 1.5% year on year, suggests it has plenty of scope for further easing if needed..

Australian economic events and implications

• Australian data provided a rather confusing picture. A fall back in the Westpac/MI consumer sentiment index in September was disappointing although it’s worth noting that this contrasts with the weekly ANZ Roy Morgan consumer sentiment index which is much stronger. While the NAB survey’s business confidence and conditions readings fell in August, confidence remained reasonably high and both are well up on first half 2013 levels. Housing finance data for July showed continuing strength with construction finance up but with the investor share back to 2003-04 peak levels providing cause for concern. Finally the ABS still seems to be having statistical problems with its monthly labour force data highlighted by an unbelievable 121,000 gain in new jobs in August, a big bounce in the labour force participation rate and a sharp fall in unemployment back to 6.1%, from the equally unbelievable 6.4% reported in July. The trend in unemployment suggests it’s still rising but not rapidly. Moreover, while the jobs gain is not believable the trend improvement in ANZ job ads, the NAB survey’s employment intentions and the Manpower Employment Outlook survey continue to point to better jobs growth ahead.

What to watch over the next week?

• In the US, the main event will be the Fed’s FOMC meeting (Wednesday) which is expected to see the Fed taper its quantitative easing program by another $10bn a month, leaving it at only $15bn and on track to end in October. Most interest though will be on how the Fed and Chairperson Janet Yellen characterise the state of the US economy and guidance regarding the timing of the first interest rate hike. Currently, the Fed states that it anticipates a “considerable time” between the ending of QE and the first rate hike, with this taken to mean six months or more. While still low inflation and wages growth and excess capacity in the labour market suggest it may want to retain this characterisation for now it may try to soften it putting a greater focus on economic data to give them more flexibility if needed. Such a move is unlikely to change the timing of the first rate hike though which is likely to be in the June quarter, but may cause a bit of market volatility.
• On the data front in the US expect to see modest growth in industrial production (Monday), continued solid readings for the New York and Philadelphia regional manufacturing surveys (Monday and Thursday), benign CPI readings (Wednesday) leaving inflation running at 1.9% year on year, a further slight rise in the NAHB homebuilder index (Wednesday) and a slight pull back in housing starts (Thursday) after a very strong July.
• In Australia, the Minutes from the RBA’s last meeting (Tuesday) are likely to repeat the “period of stability” on rates mantra and are unlikely to add anything new given Governor Steven’s has already delivered a speech on the economy since the last meeting. A speech by Assistant Governor Kent also on Tuesday will be watched for any clues though.

Outlook for markets

• 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 worries about an earlier than expected Fed rate hike, the likely ending of QE3 next month and Ukraine are potential triggers for another correction.
• However, a correction should be seen as a buying opportunity as 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, 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 investor euphoria that comes with major share market tops.
• Low bond yields, eg 10 year yields of just 0.6% in Japan and 3.6% 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 it fall to around $US0.80 in the next year or so.

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

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Important note:While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post Weekly market & economic update – week ending 12 September, 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.

• Share markets mostly rose over the past week helped by relief at the conclusion of the European and Ukrainian elections, mostly good economic data and more signs that easing is on the way in Europe. Signs that non-mining and housing investment are starting to offset the slump in mining investment also helped support the Australian share market. Despite this bond yields fell again as expectations for future interest rate levels are getting revised down. Commodity prices, including the iron ore price, were mostly lower but the $A rose a bit as the latest business investment data saw investment plans for the year ahead revised up. It’s hard to see the rise in the $A being sustained given the fall in the iron ore price and the risk that RBA interest rate hikes will be pushed into 2015.
• The win by various Euroskeptic parties in the European Parliament (EP) elections is unlikely to have much impact. Sure they got 30% or so of the vote, but it represents a protest vote as voters know that its national elections that matter, Euroskeptic parties tend to represent the extreme left and right and don’t vote together and its well short of a majority anyway. The increase in support for the extreme right in France and extreme left in Greece may concern governments in those countries but they know it’s a protest vote and governing parties did well in Germany and Italy. So it’s hard to see any real change in policy direction in Europe.
• The victory of Boris Poroshenko in Ukraine without the need for a run-off election is also a good outcome. While conflict remains in the east he is someone who can work with both Russia and the west.
• Policy fine tuning announcements in China continue to mount up, adding to confidence that growth will be supported around 7.5% for this year. These amount to various spending measures (on shanty towns, railways, etc) and monetary easings. They’ve also been underlined by Premier Li stating that downside risks should be taken seriously and that policies should be fine-tuned appropriately, so more easing measures are likely.
• In Australia, APRA announced draft qualitative guidelines aimed at encouraging lenders to appropriately manage high risk mortgages. This is very different to the quantitative restrictions on high loan to valuation ratio mortgages seen in New Zealand and reflects Australian regulators’ scepticism about the distortions such approaches result in. But quite clearly APRA does not want to see any deterioration in lending standards. To the extent this has an impact it is likely to add to the loss of momentum already seen in house prices this year and provide further room for the RBA to keep interest rates low.

Major global economic events and implications

• US economic data was mostly good. The bad news was that March quarter growth was revised to -1% annualised. However, this reflects a bunch of temporary factors including the impact of adverse weather on construction activity which will reverse. More importantly, forward looking indicators continue to improve with solid durable goods orders, continuing gains in home prices and house sales, a rise in consumer confidence, a strong rise in the Markit services conditions index and a fall in jobless claims. So the US economy remains on track to expand strongly this quarter.
• Eurozone data was a bit more mixed, with sentiment readings up across the board in May, but money supply growth remaining weak and bank lending still down on a year ago. Meanwhile, ECB officials continue to reinforce expectations for a combination of ECB easing measures to be announced at its meeting next week.
• Japanese data showed the expected fall back in household spending and industrial production in April associated with the sales tax hike and the related surge in inflation. My inclination remains that with the underlying economy and policy stimulus both stronger than was the case around the time of the 1997 sales tax hike, the impact on growth is just temporary and Abenomics will continue to work. It is notable that the unemployment rate at a low 3.6% and the rising trend in the ratio of job vacancies to applicants have both been unaffected by the tax hike, adding to confidence that its effect is temporary.

Australian economic events and implications

• Australian data was actually pretty good, relative to fears. Sure mining investment fell another 8.7% in the March quarter and business intentions point to a further 15 to 20% fall over the financial year ahead. But against this the latest capital spending plans point to a less negative outlook for 2014-15 than previously foreshadowed with mining investment set to fall more slowly and investment in other industries now looking like it will see a solid rise. On top of this residential investment rose 6.8% in the March quarter, a further rise in new home sales in April points to more to come and credit growth continued its modest acceleration in April.
• The bottom line is that the rebalancing away from mining investment as a source of growth is starting to occur. The problem though is that it’s still tentative, so it’s critical that the blow to confidence from the Budget proves temporary. It’s obvious the Government will have to compromise to get aspects of its Budget through the Senate and this may lead to some softening of the harsher measures. Something else might have to give though given the need to see the budget still heading towards surplus, and paid parental leave is a logical candidate.

What to watch over the next week?

• In the US, expect the ISM manufacturing and services conditions indexes (due Monday and Wednesday respectively) to have remained around solid readings of 55 and May payroll employment (Friday) to show a gain of 220,000. The ISM and payroll reports are likely to confirm that growth is picking up after the first quarter slump.
• In Europe, the focus will be on the ECB (Thursday) which is expected to finally act on its easing bias again and announce more monetary stimulus. This is likely to take the form of interest rate cuts but there is some chance it will also include a form of quantitative easing.
• In Australia, it will be a busy week. The RBA (Tuesday) is certain to leave interest rates on hold for the ninth month in a row as it has previously indicated is likely to be appropriate for some time yet. Since the last meeting, the Budget has clearly had a negative impact on confidence and consumer spending too according to various anecdotes, but it’s unclear how long this will last and the stimulatory effect of record low rates is still working through the economy. At the same time inflation remains benign and tentative signs of cooling in the housing market and APRA’s qualitative crackdown on high risk mortgages means the Reserve has plenty of scope to continue with low rates.
• On the data front, March quarter GDP growth (Wednesday) is expected to show that growth remains below trend with soft business investment but support from dwelling construction, consumer spending and trade likely to see GDP up 0.5% quarter on quarter, or 2.8% year on year. Expect to see a further slowing in house price growth but a 3% bounce in building approvals (both Monday), a slight setback in April retail sales (Tuesday) after 11 months of gains and a continuing trade surplus (Thursday). The AIG’s business conditions PMIs for May will provide a good indication of the impact of the Budget on business confidence.

Outlook for markets

• Shares remain vulnerable to a mid-year correction, just as we have seen in each of the last four years now. However, with shares having been in a bit of a stealth correction all year, any pull back may well be mild and in any case the broad trend in shares is expected 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 to resume their gradual rising trend as it becomes 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.
• With $A short positions now largely unwound, it’s likely that the broad downtrend in the $A is resuming. Commodity prices including the iron ore price remain relatively soft, RBA interest rate hikes are getting pushed out and the $A is likely to revert to levels that offset Australia’s relatively high cost base.

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 30 May, 2014 appeared first on AdviserVoice.