• Share markets continue to recover from their recent falls helped by a combination of good earnings news in the US, better than expected economic data in Europe, China and Japan and as the ECB started up its quantitative easing program with indications that it might be widened. Global and Australian share markets have roughly recovered half the fall they saw in the correction, with the Australian share market also being helped by investors taking advantage of 6% grossed up dividend yields. Bond yields were flat to up slightly over the past week, commodity prices were mixed with oil flat but metals up and the $A was little changed.
• Events in Canada provided a reminder of the terror threat posed to countries participating in the efforts to combat IS. (A colleague has pointed out that the term “Islamic State” should be avoided in referring to the Insurgent Savagery currently threatening Iraq, Syria and beyond as it defames one of the world’s great religions – he’s right, so I won’t).Terrorist attacks are horrible in terms of their human consequences and there is no doubt that IS related terrorist attacks in western countries will be taken badly initially by share markets, as we saw with the 1.5% dip in Canadian shares after the attack in Ottawa. But the experience with various Al-Qaida related attacks last decade 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.
• The wall of worry (global growth, deflation risks, end to US QE3, the IS terror threat, HK protests, Ukraine, Ebola, etc) remains for investors but there were some positives in the last week: manufacturing conditions PMIs unexpectedly rose in the Eurozone,  Japan and China; the ECB has now started its quantitative easing program and looks to be thinking about expanding it to include corporate bonds which would allay any concerns that it may not be big enough to have a meaningful impact; and Nigeria was declared Ebola free after earlier being seen as the next country at risk in Africa – if they can contain it the West should be able to too.

Major global economic events and implications

• US economic data was mostly favourable. While the Markit manufacturing conditions PMI cooled it remains strong at 56.2, jobless claims continue to trend down, leading indicators rose and home sales are trending up. What’s more, continued low CPI inflation of just 1.7% leaves the Fed with plenty of flexibility on interest rates.
• Of greater interest for investors, September quarter earnings continue to impress. So far 192 S&P 500 companies have reported of which 79% have beaten earnings expectations (compared to a norm of 63%) and 61% have beaten on sales. Earnings growth looks likely to have come in around 10%, compared to market expectations for a 6% gain. Sales growth is running around 5% year on year.
• The Eurozone saw some good news on the economic front with unexpected gains, albeit modest, in manufacturing and composite business conditions PMIs for October. This suggests growth continues. That said, it’s still slow and with the risk of deflation the ECB will need to ramp up its quantitative easing program.
• Japan’s manufacturing conditions PMI rose in October suggesting the recovery from the sales tax hike inspired slump earlier this year is continuing.
• Chinese data remains relatively steady. September quarter GDP growth came in at 7.3% year on year, down from 7.5% in the June quarter but slightly stronger than expected. While retail sales slowed to 11.6% this was probably due to lower inflation and growth in industrial production accelerated to 8%. Growth in investment was little changed with slower property investment being offset by strength in manufacturing and infrastructure. Meanwhile the flash HSBC PMI for October improved slightly. While the property sector will remain a drag on growth various mini-stimulus measures already announced and likely more to come should be enough to see growth this year come in “around 7.5%”. No boom, but not bust either.

Australian economic events and implications

• Benign inflation supports the case for rates to remain low. The September quarter saw a broad based fall in inflation in with headline inflation falling to 2.3% year on year. While price rises in government related sectors remain the main driving force of inflation, inflation in market related sectors fell to just 1.8% year on year. The September quarter saw price weakness in areas like clothing (-2.7% year on year), furnishings and household equipment & services (+0.4% year on year), transport (+0.2% year on year) and communications (-1.8% year on year). Subdued wages growth and falling commodity prices suggest that inflation will remain. So no pressure for a rate hike here. The message from the Minutes from the last RBA Board meeting and various speeches from RBA officials remains unchanged: rates are on hold, the $A remains too high and measures to slow bank loans to investors are being considered by the RBA and APRA.

What to watch over the next week?

• First up will be the market reaction to the ECB’s Asset Quality Review and Stress Tests to be released Sunday (9pm Sydney time). This will assess the adequacy of 130 Eurozone banks’ capital levels against both baseline and adverse scenarios and those that fail will be given 6 to 9 months to boost their capital ratios. Some failures are likely but mainly for technical reasons (ie before allowance is made for 2014 capital raisings) and mainly amongst unlisted and mutual banks, but not many of the major listed banks are likely to fail given pre-emptive capital raisings (€75bn since 2013) and conservative lending practices in the lead up to this review. In fact, just as occurred with the Fed’s stress test of US banks in 2009 it could prove to be a watershed event that helps restore confidence in Eurozone banks and clears the way for more bank lending
• In the US, all eyes will be on the Fed (Wednesday) which is expected to end the final $US15bn of QE3 it is doing each month. There is a chance that the fall in US inflation expectations will prompt the Fed to just taper by $US10bn leaving QE alive at $US5bn a month. However, in the absence of more bad global news or market turmoil ahead of the meeting we would only attach a 40% probability to this. That said, the Fed is likely to restate that a “considerable time” is expected to elapse before it starts to raise interest rates and indicate that it will allow for the impact of softer global growth, the impact of a stronger $US in holding US inflation down and the recent fall in inflation expectations which will likely serve to reinforce market expectations that the first Fed rate hike won’t come till late 2015. It may also indicate that it will ramp up QE again if needed.  
• Meanwhile September quarter US GDP data (Thursday) is likely to show that growth slipped back to a 2.9% pace, which is good but not booming after just 1.3% growth in the first half. Expect reasonable growth in pending home sales (Monday) and durable goods orders (Tuesday) along with solid consumer confidence (also Tuesday). The Fed’s preferred inflation indicator (Friday) is likely to remain around 1.5% year on year, leaving plenty of scope for the Fed to keep rates down. More than 100 US S&P 500 companies will report Q3 earnings.
• In Japan, industrial production for September ((Wednesday) will be watched for a rebound after August weakness and data for household spending, unemployment and inflation will be released Friday.
• China’s official manufacturing conditions PMI for October (November 1st) will likely be little changed.
• In Australia, expect trade prices (Thursday) to show a further decline in the terms of trade, September quarter producer price inflation (Friday) to remain benign and private credit growth (also Friday) to remain moderate. The main focus in the credit stats will be on housing credit, in particular whether growth credit to investors in housing shows any signs of moderating given RBA concerns.

Outlook for markets

• Our assessment remains that the roughly 10% top to bottom fall in share markets seen from September highs to recent lows represents a correction and not the start of a new bear market. A retest of the lows cannot be ruled out but the cyclical bull market most likely remains intact. The correction pushed share valuations well into cheap territory, the global growth outlook remains for okay growth (“not too hot, but not too cold”), monetary conditions globally and in Australia look like they will remain very easy with Europe and Japan filling the quantitative easing gap that will be left by the US and US rate hikes looking even further away and investor sentiment remains very bearish which is positive from a contrarian perspective. October is often a month where market falls come to an end ahead of a Santa Claus rally into year end and I expect to see the same happen this year.  The winding up of ECB QE, getting the ECB’s bank stress tests out of the way and US November 4 mid-term elections which look like seeing the Republicans take both the House and the Senate are likely to help.
• Low bond yields will likely mean soft medium term returns from government bonds. That said, in a world of too much saving, spare capacity and low inflation it’s hard to get too bearish on bonds.
• To its recent low of $US0.8640 the $A fell a bit too far too fast (just as the $US has risen too far to fast), so a short covering bounce has been underway and could go further. That said the broad trend in the $A is likely to remain down reflecting soft commodity prices, the likelihood the Fed hikes interest rates before the RBA and the relatively high cost base in Australia. Expect to see it fall to around $US0.80 in the next year or so.

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

————-

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

The post Weekly market & economic update – week ending 24 October, 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.

Economic & financial perspectives

• 

  Overall, it has been a positive year.

  A good year:  Total returns on Australian shares (All Ordinaries Accumulation index) are currently up 17.3 per cent over 2013/14. If returns hold at these levels through to June 30 then investors will have experienced the best back-to back returns in seven years.

• Other returns higher: Returns on dwellings are up 15.3 per cent while returns on government bonds have lifted by 4.2 per cent. A rare event – bonds, property and shares have all lifted over the past year.

What does it all mean?

The post A good year, or a very good year? appeared first on AdviserVoice.

• Expect more volatility in shares this year as earnings take over as a key driver and Fed rate hikes gets closer.
• While some are suggesting a crash is in on the cards, it’s hard to see as shares are not expensive, the global economic cycle is gradually improving, monetary conditions are easy and we lack the euphoria that goes with major market tops.
• As such, the trend in share markets is likely to remain up.

Introduction

The past few weeks has seen several predictions of a share market crash by some perennial high profile bears. The broad claim is that share markets – namely US shares – have disconnected from fundamentals and that the Fed is to blame for a poor recovery and/or doesn’t know what it is doing. And of course this is all against the background of talk of some sort of “demographic cliff” that will contribute to a “great crash ahead.” This note takes a look at the risks.

A tougher, more volatile year for shares..

Our view is that this year will see more constrained returns from shares with increased volatility – including the likelihood of a 10-15% correction along the way – than we saw in 2012 and 2013. Shares are no longer dirt cheap, they are more dependent on earnings for gains, the prospect of Fed rate hikes are starting to loom and as usual there are numerous other “worries” that could give us that volatility: China, Ukraine, etc. And of course, the seasonal pattern in shares often sees corrections occur around mid-year.

..but the trend is likely to remain up

However, it’s too early in the economic and investment cycle to expect a new bear market or crash.[1] A typical cyclical bull market goes through three phases.

• Phase 1 is driven by an unwinding of very cheap valuations helped by easy monetary conditions as smart investors start to snap up undervalued shares as investor sentiment moves from pessimism to scepticism.
• Phase 2 is driven by strengthening profits. This is the part of the cycle where optimism starts to creep in.
• Phase 3 sees euphoria with investors backing their bullishness by pushing cash flows into shares to extremes. The combination of tightening monetary conditions, overvaluation and investor euphoria then sets the scene for a new bear market.

At present we are likely in Phase 2. Some optimism regarding the economic outlook and share markets has returned but we don’t see the signs of euphoria that become evident in Phase 3 as precursors to a new bear market:

• Valuations aren’t dirt cheap, but they’re far from expensive. Price to earnings ratios are only at long term average levels of 14.4 times in Australia (average of 14.1 since 1992) and 15.1 in the US (average of 15.9). Some tech stocks have rich valuations, but the tech heavy Nasdaq trades on a price to earnings ratio that is one third of the tech boom peak and the broader US share market on 15x forward earnings is way below its tech boom peak of 24. So it’s hard to see a tech driven crash.

The gap between earnings yields & bond yields, a proxy for the excess return shares offer, remains above pre GFC norms. This is reflected in our valuation indicators which show markets slightly cheap. See the next chart.

Global economic indicators have been gradually heading higher which should be supportive of earnings growth. This is indicated in business conditions PMIs (next chart).

The post Crash calls for shares appeared first on AdviserVoice.

Investor Sign posts, week beginning 21 July, 2013

Upcoming economic and financial market events

Australia

July 22: State of the States – CommSec’s quarterly assessment of state/territory economies

July 24: Consumer Price Index (June Qtr) – We expect that prices rose 0.4% to be up 2.4% over the year

Overseas

July 22: US Existing home sales (June) – A modest lift in sales is tipped

July 23: US Home prices (May) – Data from the Federal Housing Finance Agency

July 23: US Richmond Fed index (July) – A key regional survey

July 24: “Flash” manufacturing gauges – Released in US, China and Europe

July 24: US New home sales (June) – Sales are tipped to have lifted by 1.9%

July 25: US Durable goods orders (June) – A modest 0.5% increase is expected

The big picture

• We know that the Aussie dollar has lost altitude in the past couple of months, but how far has it fallen, and how does the decline compare with corrections in the past?
• According to data from Thomson Reuters, the Aussie dollar peaked in April at US105.82c – the highest rate in three months. But in the following three months the Aussie has fallen by 15 per cent, touching US89.98c on July 12 according to the financial newswire.
• That three-month drop was the biggest in almost two years, just short of the 15.3 per cent decline recorded in October 2011 when the currency fell from US110.8c to US93.86c over a same three-month period. To find a larger drop, you actually have to go back to the midst of the Global Financial Crisis in January 2009 when the Aussie slumped almost US17 cents over a three-month period.
• The Reserve Bank believes the latest fall in the Aussie dollar is well over-due. As the chart shows, for the better part of a year the Aussie dollar had broadly trended sideways, holding between US101-106c. But over the same period commodity prices gradually trended lower.
• The break in the traditional link between the Aussie dollar and commodity prices was unusual. The Aussie dollar has always been regarded as a “commodity currency” given Australia’s high reliance on commodities or raw materials for export income.
• In part the Aussie dollar’s relative strength up to April 2013 was due to Australia’s economic out-performance. But in mid April that out-performance was re-assessed as stronger US economic data called into question the need for super-stimulatory US monetary policy settings.
• Interestingly it now appears that the Aussie dollar has fallen too far. If the Reserve Bank agrees and next week’s inflation data is on the high side of expectations, then interest rates will be kept steady at the August Board meeting.
  • In Australia, a quiet week is in prospect for new economic data. However it is a different story in the US with key indicators of housing activity to be released over the week. Also “flash” updates on the health of manufacturing sectors are expected across a raft of countries including China, the US, France and Germany.
  • In Australia, the week kicks off on Monday when CommSec releases its quarterly State of the States report, assessing the relative health of state and territory economies. Overall there are reasons to be encouraged with stronger housing activity occurring in many regions, pointing to a “passing of the baton” from mining investment and engineering construction to home building. The purchase of existing homes and building of new homes both generate significant multiplier effects across the economy.
  • On Tuesday the Bureau of Statistics (ABS) issues a report called Migrant Data Matrices, a report that attempts to pull together in one place “demographic, geographic, socio-economic and collection specific data items.” The information is useful for businesses to try to identify new marketing opportunities.
  • On Wednesday the ABS issues the quarterly inflation report – the Consumer Price index for the June quarter. Given that the economy has been generally treading water over 2013, it would be surprising if the report was to flag any inflationary pressures. Many consumers are reluctant to spend, so businesses are choosing to trim margins to lift sales, rather than adopt a strategy of lifting prices to boost profits and thus compensate for weak sales.
  • Overall we expect that the CPI rose by 0.4 per cent in the June quarter, cutting the annual rate of inflation to 2.4 per cent. And while the underlying price measures probably grew on average by 0.5 per cent in the quarter, up from 0.4 per cent, the annual rate of growth is expected to have eased from 2.4 per cent to 2.3 per cent.
  • The main seasonal boost to the inflation rate will come from the Health group, reflecting increases in private health insurance. But working to push the inflation rate in the other direction will be seasonal declines in domestic holiday travel costs.
  • Also on Wednesday the ABS issues a publication entitled Innovation and Technology Update, June 2013
  • On Thursday the ABS issues its Australian Social Trends report while its Spotlight on National Accountspublication is issued on Friday.
  • In the US, the week kicks off on Monday with data on existing home sales while the Chicago Federal Reserve also releases an activity gauge the same day. Economists tip a small 0.4 per cent lift in sales taking them to an annual rate of 5.2 million.
  • On Tuesday the customary weekly report on chain store sales is issued alongside the home price report from the Federal Housing Finance Agency, and the influential regional activity gauge – the Richmond Fed index. The FHFA calculated that prices rose for the 15^th straight month in April, up 0.7 per cent.
  • On Wednesday in the US, data on new home sales is scheduled for release. In May, sales rose for the third straight month, up by 2.1 per cent to a 476,000 annual rate. Economists are tipping a similar gain in June to a 485,000 annual rate. The weekly data on home loans will also be issued.
  • Also on Wednesday, the Markit organisation issues its “flash” July readings on manufacturing activity across a raft of countries including the US, China and Germany.
  • And on Thursday the weekly estimates of claims for unemployment insurance (jobless claims) are issued together with data on durable goods orders and a gauge on activity in Kansas City published by the district Federal Reserve office. Orders for durable goods (goods lasting three years or more) are expected to have edged 0.5 per cent higher in June.
  • The US profit-reporting season rolls on in the coming week. Around 40 companies are expected to report earnings on Monday with eight of these from the S&P 500 index including Kimberly-Clark, McDonalds and Texas Instruments. On Tuesday around 33 companies from the S&P 500 index are slated to report earnings including Apple, AT&T, United Parcel Service and Freeport McMoRan Copper & Gold. Amongst major companies reporting earnings on Wednesday are Boeing, Caterpillar, E*Trade, Ford, Eli Lilly and PepsiCo. On Thursday Amazon.com is one of the bellwether firms to report earnings together with General Motors, 3M, and Colgate-Palmolive.
  • The Australian profit reporting season kicks off with Australand, Petsec Energy and Aquarius Platinum (Wednesday), OceanaGold (Thursday) and GUD Holdings and Korvest (Friday).
  • There is one event that could define whether the Reserve Bank cuts rates again in August – the Consumer Price Index. So ahead of that event, it is useful to assess market pricing of another rate cut. Before the Reserve Bank Board minutes were released, financial markets assessed that there was a 70 per cent chance of a rate cut. Now that estimate stands at 54 per cent. However looking out over the next six months, the belief is that the Reserve Bank will cut rates again, but just once.

The week ahead

In Australia, a quiet week is in prospect for new economic data. However it is a different story in the US with key indicators of housing activity to be released over the week. Also “flash” updates on the health of manufacturing sectors are expected across a raft of countries including China, the US, France and Germany.

• In Australia, the week kicks off on Monday when CommSec releases its quarterly State of the States report, assessing the relative health of state and territory economies. Overall there are reasons to be encouraged with stronger housing activity occurring in many regions, pointing to a “passing of the baton” from mining investment and engineering construction to home building. The purchase of existing homes and building of new homes both generate significant multiplier effects across the economy.
• On Tuesday the Bureau of Statistics (ABS) issues a report called Migrant Data Matrices, a report that attempts to pull together in one place “demographic, geographic, socio-economic and collection specific data items.” The information is useful for businesses to try to identify new marketing opportunities.
• On Wednesday the ABS issues the quarterly inflation report – the Consumer Price index for the June quarter. Given that the economy has been generally treading water over 2013, it would be surprising if the report was to flag any inflationary pressures. Many consumers are reluctant to spend, so businesses are choosing to trim margins to lift sales, rather than adopt a strategy of lifting prices to boost profits and thus compensate for weak sales.
• Overall we expect that the CPI rose by 0.4 per cent in the June quarter, cutting the annual rate of inflation to 2.4 per cent. And while the underlying price measures probably grew on average by 0.5 per cent in the quarter, up from 0.4 per cent, the annual rate of growth is expected to have eased from 2.4 per cent to 2.3 per cent.
• The main seasonal boost to the inflation rate will come from the Health group, reflecting increases in private health insurance. But working to push the inflation rate in the other direction will be seasonal declines in domestic holiday travel costs.
• Also on Wednesday the ABS issues a publication entitled Innovation and Technology Update, June 2013
• On Thursday the ABS issues its Australian Social Trends report while its Spotlight on National Accountspublication is issued on Friday.
• In the US, the week kicks off on Monday with data on existing home sales while the Chicago Federal Reserve also releases an activity gauge the same day. Economists tip a small 0.4 per cent lift in sales taking them to an annual rate of 5.2 million.
• On Tuesday the customary weekly report on chain store sales is issued alongside the home price report from the Federal Housing Finance Agency, and the influential regional activity gauge – the Richmond Fed index. The FHFA calculated that prices rose for the 15^th straight month in April, up 0.7 per cent.
• On Wednesday in the US, data on new home sales is scheduled for release. In May, sales rose for the third straight month, up by 2.1 per cent to a 476,000 annual rate. Economists are tipping a similar gain in June to a 485,000 annual rate. The weekly data on home loans will also be issued.
• Also on Wednesday, the Markit organisation issues its “flash” July readings on manufacturing activity across a raft of countries including the US, China and Germany.
• And on Thursday the weekly estimates of claims for unemployment insurance (jobless claims) are issued together with data on durable goods orders and a gauge on activity in Kansas City published by the district Federal Reserve office. Orders for durable goods (goods lasting three years or more) are expected to have edged 0.5 per cent higher in June.

Sharemarket, interest rates, currencies & commodities

• The US profit-reporting season rolls on in the coming week. Around 40 companies are expected to report earnings on Monday with eight of these from the S&P 500 index including Kimberly-Clark, McDonalds and Texas Instruments. On Tuesday around 33 companies from the S&P 500 index are slated to report earnings including Apple, AT&T, United Parcel Service and Freeport McMoRan Copper & Gold. Amongst major companies reporting earnings on Wednesday are Boeing, Caterpillar, E*Trade, Ford, Eli Lilly and PepsiCo. On Thursday Amazon.com is one of the bellwether firms to report earnings together with General Motors, 3M, and Colgate-Palmolive.
• The Australian profit reporting season kicks off with Australand, Petsec Energy and Aquarius Platinum (Wednesday), OceanaGold (Thursday) and GUD Holdings and Korvest (Friday).
• There is one event that could define whether the Reserve Bank cuts rates again in August – the Consumer Price Index. So ahead of that event, it is useful to assess market pricing of another rate cut. Before the Reserve Bank Board minutes were released, financial markets assessed that there was a 70 per cent chance of a rate cut. Now that estimate stands at 54 per cent. However looking out over the next six months, the belief is that the Reserve Bank will cut rates again, but just once.

The post Investor Signposts: Week Beginning July 21 2013 appeared first on AdviserVoice.

The key points are as follows:

• After strong gains shares were due for a correction. Worries about the Fed, Japan, China and the growth outlook in Australia have provided the trigger. 
• However, with Fed tightening fears overdone, the US economy on a sounder footing, Japan looking stronger, China likely to grow around 7.5% and the Australian economy to benefit from low interest rates and a lower $A, a re-run of the 15 to 20% falls seen around mid 2010 and mid 2011 are unlikely.
• Our cyclical view for shares remains positive, with further gains likely this year. We remain of the view that by year end the ASX 200 will end around 5250.

To read more, click here.

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Sharemarket lifts as dark clouds dissipate

A stellar start to 2013…the S&P/ASX 200 has lifted by 8.3 per cent in the first 48 days of 2013.

• If the sharemarket keeps up this pace, it will rise by 67 per cent over the full year – exceedingly unlikely. At the same point in 2012, the ASX 200 had lifted by 4.9 per cent.
• Since September last year around $200 billion has been added to the value of listed shares (market capitalisation).
• US sharemarkets also produce solid gains. The broad S&P 500 index in the US has risen by 6.6 per cent so far in 2013, slightly behind gains of 6.8 per cent at the same point in 2012.

What does it all mean?

• When the sharemarket is falling, investors get worried. And when the sharemarket is going gangbusters, investors get worried. And at present it is the latter situation. With the year just 48 days old, the Aussie sharemarket has lifted 8.3 per cent – translating to annualised gains of 67 per cent.
• It is highly unlikely that gains of this magnitude will be realised. From here, the market will undoubtedly have some setbacks or face a period of consolidation. But for now, it is the absence of bad news and shift of funds from cash to other asset classes like shares and property that is holding sway. Sharemarkets have bounced higher across the globe as bad news has evaporated and volatility has fallen.
• In simple terms, would you want to invest if the sharemarket is bouncing around on a daily basis with advanced economies in Europe and North America lurching from crisis to crisis? The “do what it takes” attitude of European and US politicians has been fundamental in restoring stability.
• The Australian sharemarket has done relatively better than the US markets over the past five months, largely because it under-performed in early 2012 when there were uncertainties not only about advanced nations but also China. But now with fears allayed about a “hard landing” in China, investors are again keen to back Aussie shares.
• This note attempts to separate the hype from the reality, presenting the pertinent facts and figures on the sharemarket’s performance.

State of Play

• The ASX 200 has lifted 8.3 per cent in the 32 trading days of 2013. If the index was to keep up this pace over 2013, it will have lifted by 67 per cent. The broader All Ordinaries has risen by 8.4 per cent in 2013. The All Ordinaries Accumulation index (includes share price gains and dividends) has lifted 8.5 per cent this year.
  Over the year, the ASX 200 is up 18.4 per cent with the All Ordinaries up 16.8 per cent. The All Ordinaries Accumulation index is up 23.9 per cent.
• The US Dow Jones has lifted 6.7 per cent in 2013 so far with the S&P 500 up 6.6 per cent and Nasdaq up 5.7 per cent.
• Of other major markets, the Japanese Nikkei has gained 8.4 per cent with the UK FTSE up 7.3 per cent but the German Dax has lost 0.2 per cent.
• Over the year the US Dow Jones is up 9.4 per cent with the S&P 500 up 13.1 per cent and the Nasdaq has gained 9.4 per cent. The out-performer has been, the Japanese Nikkei, up 20.7 per cent, with the UK FTSE up 7.4 per cent and the German Dax up 12.4 per cent.
• According to FactSet, in US dollar terms the Australian sharemarket has risen by 7.1 per cent so far in 2013, ahead of the “world” market with a gain of 5.0 per cent but just behind the 7.2 per cent gain of the US market. The strongest gain has been recorded by Argentina (up 18.5 per cent), followed by Greece, (up 16.6 per cent).

Total returns

• Over the past 20 years, the All Ordinaries Accumulation index has risen on average by 11.5 per cent a year. In the US, the S&P 500 total return index has lifted 10.0 per cent on average over the same period.
• Over the past decade, the comparison was: All Ordinaries Accumulation index, up on average by 11.7 per cent a year versus gains of 8.8 per cent a year for the S&P 500 total return index.
• Over the last five years, the comparison was: All Ordinaries Accumulation index, up on average by 2.0 per cent a year versus gains of 4.5 per cent a year for the S&P 500 total return index.

Proximity to record highs

• The All Ordinaries peaked at 6,853.6 on November 1 2007 with the ASX 200 at 6,828.7 on the same day. The All Ords needs to rise 35.6 per cent to reach record levels while the ASX 200 needs to lift 35.7 per cent.
• In terms of total returns (share prices and dividends) both the All Ordinaries Accumulation index and ASX 200 Accumulation index need to lift around 7 per cent to reach record highs.
• The current value of the Australian sharemarket (market capitalisation) stands at $1,588.3 billion, just over 10 per cent below record highs.
• A number of market sectors (accumulation indexes) are already at record highs: Financials (excluding REITs), Industrials and Consumer Staples. The Telecoms accumulation index is just 0.8 per cent below the January 29 high. And the Utilities and HealthCare sectors are around 2 per cent below record levels. The main drags are Energy, Materials and Consumer Discretionary sectors.
• The US Dow Jones peaked at 14,164.5 on October 9 2007 while the S&P 500 peaked at 1,565.2 on the same day. The Dow Jones needs to lift 1.3 per cent to reach record highs while the S&P 500 needs to lift by 3.0 per cent.
  Arguably – just like the US Nasdaq – the Australian sharemarket rose too far, too fast during the China boom of 2007. The market soared above its long-term trend band (“normal” growth rate) and then fell to the bottom of the band and now the market is again aiming for the middle of the band. The 1987 sharemarket was a similar case where irrational exuberance took hold.

Volatility dries up

• Over the past six months there have been only six days when the ASX 200 has either risen or fallen by 1 per cent over the session. Two of those days occurred in January but they were days when the market rose by just over 1 per cent. There were no high volatility days in December.
• Volatility eased over 2012 but the reduction was particularly evident from September 2012. Investors began to edge their way back into the market over September and October but the gains since November 16 2012 have been stellar with the market lifting by 1,000 points.
• Consumer sentiment in Australia is especially sensitive to sharemarket movements. In the latest survey, the consumer sentiment index lifted 7.7 per cent in February despite a decision by the Reserve Bank to leave interest rates unchanged in the month and a softer Aussie dollar. The main catalyst to the lift in confidence levels was the continued recovery of the Australian sharemarket, boosting incomes for direct shareholders and superannuants alike.

Cheap or Dear? Valuations recover

• According to FactSet the 1-year forward price-earnings ratio for the Australian sharemarket stands at 15.44 – the highest level in almost three years (since March 2010). But while the forward PE is still below the 20-year average of 15.6, it stands above the decade average of 14.6.
• While the Australian 10-year average forward PE is 5.7 per cent above decade averages, the equivalent ratio in the US is almost 11 per cent below the decade average while the “world” index is 6 per cent below the decade average. A number of Asia-Pacific markets also have PE ratios above long-term averages and also seem poised for a period of correction.
• Similarly the historic PE ratio for Australia stands at 16.97, above the decade average of 16.5 but below the 20-year average of 18.9.

Dividends still attractive

• The dividend yield for the broader Australian All Ordinaries index stands at 4.34 per cent, the lowest levels in 17 months and down from highs of 6.85 per cent set in January 2009. However the current dividend yield is still above the decade average of 4.05 per cent and the 20-year average of 3.84 per cent.
• Of major stocks, current historic dividend yields include: NAB (6.10 per cent), Telstra (6.05 per cent), Westpac (5.69 per cent), Commonwealth Bank (5.39 per cent), ANZ (5.22 per cent) and AMP (4.89 per cent).
• By comparison the Reserve Bank quotes the “special” rate for term deposits at 4.25 per cent, down from highs of 6.00 per cent in July 2011. The rate for bank’s bonus savings accounts above $10,000 stands at 4.50 per cent, down from 5.45 per cent in October 2011. In terms of property, RP Data/Rismark quoted gross returns on dwellings in January ranging from 3.4-15.4 per cent with the capital city aggregate at 6.3 per cent. Rental yields stood at 4.9 per cent for units and 4.2 per cent for houses.

Outlook

• The Australian sharemarket has come a long way in a short space of time with the ASX 200 up 1,000 points in the past three months. The sharp run up in share prices is in response to more settled global economic conditions, prompting investors to move out of lower-yielding defensive assets into “riskier” assets such as shares and property.
• As at September 2012 there were 23 per cent of financial assets held in cash and deposits, above the long-term average of 20.2 per cent. At the same time there were 15.7 per cent of assets held in listed shares, below the long-term average share of 19 per cent. To get to a “normal” share of assets, cash & deposits would need to fall around $220 billion while holdings of listed equities would need to rise by $260 billion. Since September, the market capitalisation of the sharemarket has lifted by around $200 billion.
• The sharp run up in share prices has gradually reduced the attractiveness of shares. The price earnings ratio has now lifted to three-year highs and is close to 20-year averages as well as being 5-6 per cent above decade averages. Again, the sharp run-up in share prices has served to push down the returns (dividend yields) of major companies.
• While at some point the Australian sharemarket faces a period of correction or consolidation, there is still a wave of funds flowing from cash and other defensive assets to shares and property. While a significant value of funds has already moved back into equities, around $100 billion is still likely to flow from cash to equities to establish a small overweight position.
• We retain a conservative view on the sharemarket, tipping the ASX 200 / All Ordinaries index to end 2013 around 5,300 points. That target could indeed be overshot in the next few weeks, and we will closely monitor the progress of markets before re-assessing forecasts.
• But we are conscious of the fact that advanced nations still have hurdles to clear. European nations need to strike a balance between growth and austerity to ensure they are sustainably achieving progress in winding back budget deficits and government debt. A general election in Italy will also be closely watched to ensure that the new government is committed to fiscal consolidation.
  It is a similar situation in the US, although encouragingly housing and export sectors are growing. Congress must still achieve agreement on the budget as well as the debt ceiling.

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The index is 12.2 per cent from record highs. Consumer Staples, Utilities and HealthCare indexes hit record highs yesterday.

What does it all mean?

• Traditionally, when investors have wanted to know how the sharemarket was travelling they would turn their attention to two key gauges: the S&P/ASX 200 index or the All Ordinaries index. But these indexes are just measures of share prices – they don’t take into account the dividends that investors have earned over time. And clearly dividends are a significant component of the returns achieved on shares or equities.
• In fact figures compiled by Mercer show that fund managers that invested in companies paying high dividends produced an average return of 23.6 per cent in 2012, ahead of the 20.3 per cent median return by fund managers.
• The S&P/ASX 200 index is currently 44.1 per cent below the record highs set in November 2007. But the S&P/ASX 200 accumulation index reveals a far different picture, a mere 12.2 per cent away from record highs. If the Australian sharemarket produces similar gains in 2013 to last year then record levels will be quickly in sight.
• In fact three of the key sector accumulation indexes are at record highs. Yesterday the ASX 200 accumulation indexes for Consumer Staples, Utilities and HeathCare hit record highs. The Telecom sector hit record highs on Monday and is just 0.3 per cent away from record levels. And the Financials (excluding REITs) and Information Technology sectors are just 3 per cent off record levels.
• Certainly total returns on shares have posted solid gains of around 20 per cent over the past year with HealthCare (up 55.1 per cent) and Telecoms (up 47.5 per cent) outperforming.

What are the implications for interest rates and investors?

• The key message for investors is to never lose sight of the total returns achieved on your investments. Clearly that advice doesn’t just apply to stocks. An investor buying an apartment certainly doesn’t just look at the potential capital appreciation on the property but also the likely rental returns over time. Of course when assessing total returns, it is also a case of keeping costs in mind. There are costs associated with buying, selling and maintaining investments as well as taxation implications. And those costs need to be totted up at the same time that prices and rental or dividend returns are being assessed.
• The sharp lift in sharemarket returns over the past year would no doubt come as a surprise for many Australians, particularly those with little interest in shares. But clearly the superannuation returns for Australian workers have posted solid gains over the past year, boosting wealth and income levels.

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Results are up to and including August 28.

It was being billed as a horror. In the end there were a few scares but the profit reporting season failed to live up to some of the doom and gloom predictions. Perhaps that is because companies under promised and over delivered. Perhaps it reflects the depressive sentiment of the environment that isn’t lining up against the reality.

But overall companies are still reporting profits, although they are understandably lower than a year ago.

To read the report, click here.

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Headline developments of the past week

• The past week saw a bit of volatility return to risk trades early in the week on worries that China’s 7.5% growth target for this year is too low, uncertainty about Greece’s bond swap and news Brazilian GDP growth had slowed to 1.4% last year. Markets steadied later in the week though as the Greek bond swap got solid support, ahead of the Greek Government confirming that it had met its target for acceptance and that after triggering collective action clauses the participation rate is nearly 96%. The swap will reduce the value of privately held Greek public debt from €206bn to around €100bn and substantially reduce its interest costs. Eurozone finance ministers have now cleared a €35.5bn first tranche of funds for Greece under is second bailout and this means that Greece can now make a bond payment on March 20. Greece is still likely to face problems down the track, but for now a messy Greek default has been headed off yet again.
• Concerns about China’s 2012 growth target of “just” 7.5% are way overblown. China’s annual growth target is a minimum bound of what is considered acceptable. Its annual growth target has been exceeded every year since 2000 by at least 1% pa. We continue to see Chinese growth this year of around 8%. Meanwhile, China’s inflation target of 4% is too pessimistic with inflation already having fallen to 3.2% in February. And its budget deficit projection of 1.5% of GDP amounts to a slight easing in fiscal policy compared to the smaller deficit achieved for 2011 and looks likely to be an underestimate of the actual affect as unspent local government spending gets carried forward into 2012. I can’t see much threat to the growth outlook in any of this.
• Global central banks are still in easy mode. The US Fed looks be toying with the idea of another round of quantitative easing, with the aim of buying bonds to keep down borrowing costs but soaking up the liquidity to ensure no impact on inflation. The Brazilian central bank cut its cash rate by 0.75% with further easing likely as growth has slowed sharply and its cash rate is still 9.75%. The Reserve Bank of India cut the required cash reserve ratio for banks for the second time this year. The Bank of Canada left rates on hold but there appears no urgency to tighten. Both the Bank of England & ECB left monetary policy unchanged.
• In Australia, the Reserve Bank left interest rates on hold. Our assessment remains that interest rates need to be cut and that they will be some time in the next few months. GDP growth is currently running well below trend, while mining related activity is booming (up 27% year on year according to Goldman Sachs’ estimates) the non mining economy is contracting (by 1.1% year on year), the jobs market has stalled and were it not for a sharp fall in labour force participation over the last year unemployment would have risen to around 6%, inflation is benign and the strong $A along with hikes in bank mortgage rates have delivered a de facto monetary tightening when the economy needs the opposite. And finally, given cautious consumer and business attitudes to debt following the GFC we see the neutral level for the cash rate as being 0.5% below current levels. We anticipate the RBA will cut interest rates in May.
• The Australian floods are terrible from a human perspective, but their economic impact is likely to be minor compared to last year’s floods as they are not affecting big coal mines, they have not affected a big capital city and appear to have only a modest negative short term affect on food supply (unlike last years hit to the banana supply). Over the medium term it’s a godsend given full dams and replenished ground water.

Major global economic releases and implications

• US economic data was mostly solid with a rise in the ISM non-manufacturing conditions index, another month of strong employment growth in February, solid growth in consumer credit and a further gain in weekly mortgage applications. Trade and productivity growth data was disappointing though.
• European data was soft with a fall in a PMI services conditions index for February below the initial flash reading and a sharp fall in German factory orders. At least, German industrial production rebounded in January.
• Japanese news was positive with December quarter GDP revised up and a rise in economic sentiment.
• Chinese economic data for February revealed a further moderation in economic activity indicators and another fall in inflation to 3.2%. Inflation is now well down from the peak of 6.5% seen in July and provides plenty of scope for further monetary easing, which we expect to ensure that the economy has a soft landing.

Australian economic releases and implications

• Australian GDP growth in the December quarter was just 0.4% GDP or 2.3% growth year on year as weakness in consumer demand, housing and business investment all bore down on spending and softness in profits and employee compensation bore down on income. While mining capex is likely to drive stronger business investment in the current quarter, non-mining capex, consumer spending and housing activity are all likely to remain weak. What’s more the jobs market has virtually stalled and conditions in the services and construction sectors weakened in February. And just to cap off a bad week on the data front, the trade balance swung back into deficit in January driven by a slump in gold and iron ore exports. Fortunately, a return to surplus is expected in February as iron ore exports return to previous levels and gold exports are normally very volatile.
• Slumping tax revenues further confirm the tough times the economy is going through. However, talk of a new round of spending cuts to ensure a budget surplus for 2012-13 is concerning as fresh fiscal austerity will only make life tougher for the non-mining economy. Hopefully the Government will choose to rely more on timing tricks around spending and measures such as the sale of telecommunications spectrum to achieve the surplus.

Major market moves

• Share markets had a somewhat volatile week, initially falling on global growth worries to then recover on optimism regarding Greece’s bond swap. Australian shares continued to underperform their global counterparts, dragged down by more poor economic data and the RBA’s decision to leave interest rates on hold.
• Commodities prices were generally softer and this combined with soft Australian data weighed on the $A.
• Sovereign bond yields were mixed. Down in Australia, up in the US and flat in Germany. The good news is that Italian 10 year bond yields made new lows for the year highlighting that fears of a flow on from Greece’s partial default to core Europe have receded.

What to watch over the week ahead?

• In Europe, the focus is likely to be on the EU finance ministers meeting on Monday in terms of progress towards strengthening Europe’s debt firewall.
• In the US, the Fed is unlikely to unveil any changes to monetary policy following its meeting on Tuesday. Rather the post meeting statement will be gleaned for any clues regarding the prospects of QE3. Meanwhile expect February retail sales to increase by 1% (Tuesday), industrial production to increase by 0.5% (Friday), manufacturing conditions in the Philadelphia and New York regions to have remained solid (Thursday) and inflation to have been boosted by rising fuel prices (Friday).
• In Australia expect recent news of rising unemployment, soft economic growth and rises in bank mortgage rates to have resulted in a fallback in consumer sentiment after several months of solid gains (Wednesday). Data for housing finance and starts will also be released.

Outlook for markets

• Shares are still vulnerable to a further correction in the short-term given high levels of investor sentiment, strong gains year to date and the oil price surge. However, any pullback globally is likely to be mild and the broader trend is likely to remain up. Valuations are attractive, particularly against very low bond yields, the risk of a Euro-zone meltdown continues to fade, momentum in global economic indicators is positive, global monetary conditions are getting easier and easier and there is lots of cash on the sidelines. We continue to see the S&P/ASX200 pushing up to 4800 by year-end, but thanks to tougher monetary conditions in Australia and the strong $A, the Australian share market is likely to remain a relative laggard.
• Low global bond yields in major countries suggest low returns unless Europe’s debt crisis intensifies. Good quality Australian corporate debt is a better bet.
• Beyond the current consolidation/correction, the broad trend in the $A is likely to remain up, helped by more global quantitative easing, solid commodity prices & better global confidence. A retest of $US1.10 is likely.

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