• 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.

• Global share markets mostly rose over the last week helped by indications from the Fed that it’s still in no hurry to raise interest rates, expectations that the ECB might have to provide more stimulus, the Scottish No vote removing risks over UK assets and the continuing slide in the Yen to a six year low providing a boost to Japanese shares. Chinese shares fell but only slightly thanks to signs of monetary easing. The combination of poor Chinese economic data and the falling $A weighed heavily on the Australian share market as foreign investors tend to retreat to the sidelines whenever the $A is under threat.  Bond yields were little changed but the $US continued its ascent which in turn saw the Australian dollar remain under pressure and falling below $US0.90.
• The US Federal Reserve provided no surprises with another $US10bn taper to its QE program leaving it on track to end next month and an ongoing assessment that considerable labour market slack remains and that a “considerable time” is likely to elapse between the end of QE and the first rate hike. However, the Fed is incrementally continuing to become less dovish with Fed officials’ “dot plot” of interest rate expectations getting revised up slightly and Janet Yellen highlighting that the timing of the first rate hike is dependent on how the economy performs. Our assessment remains that the Fed can afford to take its time for now, but in the June quarter next year it will start to gradually raise rates. The anticipation and then the reality of this could cause bouts of share market volatility – particularly whenever there is a run of strong US economic data, but it’s unlikely to derail the bull market as rate hikes will be reflecting strong economic and profit conditions.  Only when interest rates reach onerous levels will there be a significant problem, but that will be a fair way off.
• Thankfully common sense prevailed in Scotland and the No vote won. This is good news for UK and Scottish assets and more broadly for the Eurozone as other pro-independence movements likely the Catalonians in Spain weren’t given the encouragement a Scottish Yes vote might have provided. Catalonia’s potential referendum for November will be the next one to watch though.
• The Ukraine crisis may be heading towards a resolution of sorts, with the Ukrainian Parliament granting a degree of autonomy to the eastern regions currently in conflict. There may still be more to go before the conflict is resolved, but with Russia describing the move as positive we may be getting to the point where Ukraine starts to recede as an issue for investment markets.
• In Australia, the minutes from the RBA’s last meeting repeated the “period of stability” mantra on interest rates but expressed more concern about the growth in investor housing credit and house prices. The RBA is stuck between a rock – in terms of the risk of accelerating house prices – and – a hard place in the form of the Australian dollar which remains too high, despite recent falls. The best approach is likely to be more jawboning to the effect that home buyers need to be cautious and that the $A remains overvalued. If the property market does not cool down a bit and the $A remains too high, I suspect that the RBA may then be tempted to go down the path of encouraging APRA to raise the risk weighting for home loans rather than start raising interest rates.
• Right now the Australian dollar is going in the right direction helped by the Fed’s gradual move towards monetary tightening. There is a bit of technical support around $US0.89 but I expect that by year end the $A will have fallen through the January low of $US0.8660 on its way to around $US0.80 over the next year or so. A lower $A will provide a shot in the arm for trade exposed sectors of the economy at a time that we need them to perk up as mining investment slows.

Major global economic events and implications

• US economic data was mostly favourable with solid growth readings but low inflation. Industrial production unexpectedly slipped in August, but strong regional manufacturing surveys point to a bounce back this month. While housing starts and permits fell this was only after a huge surge in July and a stronger than expected gain in the NAHB homebuilder index points to strength head. Finally, jobless claims fell and household net wealth rose 10% over the last year, providing a strong wealth boost. Meanwhile, inflation remains low with headline and core CPI inflation falling to 1.7% year on year in August which partly explains why the Fed is in no hurry.
• Bank take-up of the ECB’s first auction of cheap funding under its new Targeted Long Term Refinancing Operation (TLTRO) program was around half expectations at €83bn, which may partly reflect bank caution ahead of the ECB’s review of the quality of their assets. So hopefully the next auction in December will see more interest, but in the meantime it puts pressure on the ECB to quickly ramp up its quantitative easing program.
• In China a sharp fall in the MNI business indicator suggests that the growth slowdown may have continued into September and home prices continued to fall in August with average prices down just over 1% with virtually all cities seeing falls. Meanwhile, the Chinese central bank may be reacting to the growth slowdown with reports that it is providing RMB500bn to the major banks and a fall in the 14 day money market rate. While a cut to the PBOC’s 12 month benchmark interest rate would be more appropriate as Chinese interest rates remain too high for the Chinese private sector, its latest moves are welcome and highlight that the authorities are prepared to support growth.

Australian economic events and implications

• There were only secondary data releases in Australia over the last week and they were all soft. Auto sales and the Westpac leading index both fell in August and the weekly ANZ Roy Morgan consumer confidence index fell slightly.

What to watch over the next week?

• Globally, the main focus in the week ahead will be the release of September business conditions PMIs (Tuesday) in China, Europe and the US. The flash HSBC manufacturing PMI for China will be watched to see whether the latest slowdown continued into September, Eurozone PMIs are expected to remain off their previous highs and the US PMI is expected to remain strong.
• In terms of other US data, expect further gains in existing homes sales (Monday) and new home sales (Wednesday), a fall back in headline durable goods orders (Thursday) after the aircraft inspired surge seen in July but a continuing trend rise in underlying orders and another upwards revision to June quarter GDP growth (Friday) to 4.6% annualised from 4.2%.
• Japanese inflation data will be released Friday, but is being boosted by the April sales tax hike. Excluding this it’s likely to remain around 0.5% year on year on a core basis, which is better than the deflation that prevailed for a long time but still has a fair way to go to reach the 2% inflation target.
• In Australia, the RBA’s half yearly Financial Stability Review (Wednesday) is likely to indicate that the financial system remains in good shape, but express concern that the residential property market may be getting too hot and potentially posing risks for financial stability in the future if it continues to hot up. Speeches by RBA Governor Stevens (Thursday) and Assistant Governor Richards (Friday) will be watched for further comments on how the RBA sees the risks around the property market, the broader economic outlook and the $A. They are likely to reinforce the rates on hold message. Data for job vacancies will also be released.

Outlook for markets

• Shares are still at risk of occasional corrections particularly ahead of the end of US quantitative easing next month, the US mid-term elections in November and with September and October often proving volatile for shares. Australian shares are also vulnerable in the short term to further falls in the iron ore price and as foreign investors stay on the sidelines as the $A falls.
• However, occasional corrections are healthy in allowing shares to let off a bit of steam and should be seen as a buying opportunity as the cyclical bull market in shares likely has further to go. We still don’t see the signs of shares being over valued, over loved and over bought normally seen at major market tops. Valuations remain okay, global earnings are continuing to improve on the back of gradually improving economic growth, global monetary conditions are set to remain easy and there is no sign of investor euphoria.
• Our year-end target for the ASX 200 remains 5800. Although the falling $A is initially a drag for the Australian share market as foreign investors retreat to the sidelines, after a while it will start to become a source of support as it flows through to upwards revisions to earnings expectations. Roughly speaking each 10% fall in the value of the $A boosts company earnings by 3%.
•  Low bond yields will likely mean soft returns from government bonds, particularly as we continue to edge closer to the start of a gradual interest rate tightening cycle in the US.
• The combination of soft commodity prices, the likelihood the Fed 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

————-

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 19 September, 2014 appeared first on AdviserVoice.

• 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

———–

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

Major global economic events and implications

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

Australian economic events and implications

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

What to watch over the next week?

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

Outlook for markets

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

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

————

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

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

• Share markets continued to move up over the past week helped by a combination of good economic data in the US, expectations that central banks will remain supportive and as geopolitics took a back seat. Good earnings results also helped boost the Australian share market to a post GFC high. Reflecting better US data and an abatement of safe haven demand bond yields mostly rose. Commodity prices were mixed though with oil and gold down but metals up. A stronger $US saw the Yen and euro down but the $A little changed.
• The message from the last week hasn’t really changed much. The US looks good but continuing low inflation is giving the Fed plenty of breathing space, Japan seems to be gradually emerging from the tax induced June quarter slump but Europe remains soft and Chinese data came in a bit softer than expected. Reflecting this, August business conditions PMIs rose nicely in the US and Japan, but slipped in China and Europe. The overall global recovery remains on track, but its gradual and it is not an environment where central banks will be in a hurry to take away the punch bowl.
• Rates on hold for a while yet, is also the key message in Australia. Governor Steven’s Parliamentary Testimony providing a good insight to the RBA’s thinking. In essence, Governor Stevens thinks the RBA has done enough on rates and we are seeing a pick-up in financial risk taking, but we now need to see a pick-up in “animal spirits” to drive more real economy risk taking via increasing non-mining investment. So it’s now a matter of keeping rates stable and low until this flows through. So the RBA has no real inclination to raise or cut rates. Given likely sub-trend growth in the near term and benign inflation and the still strong $A, the cash rate could be stuck at 2.5% out to mid next year at least.
• The Ebola threat is worth keeping any eye on as its continuing to rage in West Africa and the chance of travellers returning with it from Africa to a western country sooner or later can’t be ignored. In terms of assessing the market impact, signposts to watch are: the number of new cases (for signs of a peak or otherwise), its rate of spread into Nigeria, cases showing up in Western countries and transmission within Western countries. Just bear in mind though that it’s about as transmissible as HIV so if it does find its way into western countries modern medical facilities and higher hygiene standards should mean it is contained. So for investors I think it remains a case of being alert, but not alarmed.

Major global economic events and implications

• US economic data remains pretty positive with strong gains in home builder conditions, housing starts, existing home sales and the Markit and Philadelphia Fed business conditions indexes but softer than expected inflation in July of just 1.9% year on year at a core level. The rise in housing indicators confirms that the housing recovery is getting back on track but at the same time benign inflation gives the Fed plenty of breathing space. So while the Minutes from the Fed’s last meeting saw a more hawkish tone and acknowledgement of progress on the labour market, the majority on the Fed are still cautious having seen a few false starts before and in no rush to tighten.
• It was a similar story on inflation in the UK with the July CPI actually falling and adding to signs that the Bank of England’s first rate hike is still some time away.
• Japanese economic data is showing signs the economy is shaking off the tax hike hit with the Markit manufacturing PMI up more than expected in August and gains in leading indexes and machine tool orders.
• Eurozone business conditions PMIs disappointingly, but not unsurprisingly, fell in August. While they remain at levels consistent with quarterly growth of around 0.3% they highlight that the recovery remains fragile and that the ECB has more work to do.
• Chinese economic data economic data is a mixed bag with profit growth up in July and the MNI business confidence indicator rising to its highest in nearly three years, but the flash August HSBC PMI falling back more than expected and the decline in house prices picking up in July with 64 of 70 cities seeing price declines and average prices falling by around 1%. The HSBC PMI is just stuck in the same range around 50 it has been in for the last three years now which remains consistent with growth around 7.5%, but the risks from the housing slowdown mean more mini-stimulus measures may still be required.

Australian economic events and implications

• There were only second order data releases in Australia, but the ANZ/Roy Morgan weekly consumer confidence survey and skilled job vacancies both rose nicely highlighting that there is a bit of light at the end of the tunnel for the Australian economy.
• The profit reporting season is now 75% done and is looking good. Sure it’s not been easy for non-financial industrial companies and there is still another week of results left with poorer performers often reporting late in the season. But the bottom line is that the June half earnings results are nowhere near as bad as many feared. In fact, the profit results overall are looking pretty good. 53% of companies have exceeded expectations (compared to a norm of 43%), which is the best result in nine years; 71% of companies have seen their profits rise from a year ago (compared to a norm of 66%); 67% of companies have increased their dividends from a year ago (up from around 60% in the last two years); and 58% of companies have seen their share price outperform the market on the day they released results, which is the best result in four years. Key themes have been continued strength for resources (notably Rio, although BHP disappointed), banks doing well (with a good result from CBA), ongoing cost control making up for still soft revenue growth and strong growth in dividends reflecting investor demand for income and corporate confidence in earnings prospects. Australian earnings for 2013-14  look to be on coming in a bit stronger than consensus expectations for growth of around 12 to 13%. This is being led by resources with a 28% gain, followed by banks up 10% and the rest of the market up around 4.5%. Consensus expectations for 5% earnings growth in the current financial year look a bit low to me.

What to watch over the next week?

• In the US, expect a solid bounce in new home sales after a weak June and continued strength in the Markit services PMI for August (both Monday), a continued trend rise in durable goods orders, modest gains in home prices, a slight fall in consumer confidence (all Tuesday), a rise in pending home sales (Thursday) and a continued benign reading for the core private consumption deflator (Friday) which is the Fed’s preferred inflation measure.
• In the Eurozone, expect a slight fall in confidence readings (Thursday) and continuing low inflation in August (Friday).  Lending data (Thursday) will be watched for signs that recent improved momentum is continuing.
• Japanese data for household spending, industrial production and the labour market to be released Friday will be watched for further signs of recovery following the tax induced growth contraction in the June quarter. Inflation data will also be released Friday.
• In Australia, expect June quarter construction data (Wednesday) to be soft but supported by the ongoing housing construction recovery but June quarter capital spending (Thursday) to remain soft as mining investment continues to slow. The focus in the capex survey though will be on investment intentions which are expected to show further signs of an improving outlook for non-mining related investment. Expect new home sales (Thursday) to remain solid and private credit (Friday) to show a further modest improvement in momentum.
• It will also be the final week of the Australian June half profit reporting season with 50 major companies due to report, including Worley Parsons, Qantas and Woolworths. The final week often sees a few rough results as laggards sometimes come last.

Outlook for markets

• While we remain in the time of the year renowned for share market corrections, so another bout of volatility in the next month or so is possible, the broad trend in shares is likely to remain up.Valuations remain okay particularly once low interest rates and bond yields are allowed for, global earnings are continuing to improve on the back of gradually improving economic growth, monetary conditions are set to remain easy for some time and there is no sign of the euphoria that comes with major share market tops. Our year-end target for the S&P/ASX 200 remains 5800.
• Low bond yields, eg 10 year yields of just 0.5% in Japan and 3.5% in Australia, will likely mean soft returns from government bonds.
• The combination of soft commodity prices, the likelihood the Fed will start raising interest rates ahead of the RBA and relatively high costs in Australia are expected to see the broad trend in the $A remain down. Expect to see $US0.80 in the next few years, but as always with currencies getting the timing right is hard.

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

———–

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

The post Weekly market & economic update – week ending 22 August, 2014 appeared first on AdviserVoice.

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

Major global economic events and implications

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

Australian economic events and implications

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

What to watch over the next week?

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

Outlook for markets

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

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

——–

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

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

• Share markets 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.

• It’s been another somewhat mixed week for global and Australian shares as indexes flirt with post GFC highs and the situation regarding Ukraine remains uncertain, economic data continues to be rather confusing and Fed Chair Janet Yellen left the door open for a pause in slowing its monetary stimulus if needed. US shares saw good gains with the S&P 500 making a new record closing high, Japanese and European shares were little changed and Australian shares fell slightly not helped by poor business investment data. Most share markets, bar China and Japan, had a solid February though making up for the declines seen in January.
• Reflecting mixed economic data and worries about Ukraine, bond yields mostly fell over the last week and commodity prices were soft. The $A was little changed.
• Despite the demise of the Yanukovych government, Ukraine remains a source of uncertainty for markets. It’s way too small and its problems too specific to be a threat to global economic growth. The main risk worth keeping an eye on though is that it triggers some sort of conflict between the West and Russia, as Russia sees it as a brotherly country and does not appear happy at its recent swing back to the West, as evident by troop exercises along its border. That said while there may be a lot of bluster from Russia its doubtful that it can afford to do anything too drastic (like an invasion).
• Is the PBOC easing? Falling Chinese money market rates and a decline in the value of the Renminbi (RMB) seem to have created a bit of confusion over the last week. Both of these could just be normal market noise, eg the RMB  is only down around 2%, and the People’s Bank of China could just be providing a reminder that it can be volatile and is not a one way bet higher. Then again it could signal a slightly easier stance on monetary policy, which may be consistent with recent mixed economic data and clear signs that Chinese home price growth is cooling down. Time will tell.
• More jobs layoffs in Australia. News that Qantas will lay off 5000 workers adds to the sense of gloom hanging over the Australian jobs market. But it’s worth noting that the layoffs do not reflect a lack of demand but rather competitive pressures Qantas is facing, that they will be spread out over the next three years and that the coming housing construction recovery, the lower $A and improved business confidence and general hiring plans all point to a strengthening in jobs growth most likely during the second half of this year. So it’s not all doom and gloom.
• Hot internet start-ups and takeovers of such stocks with little revenue or earnings along with talk that the “number of users is the dominant driver” is all very reminiscent of 1999 in the tech space. Fortunately while there may be pockets of 1999 around, the broader US market is a long way from late 1990s valuations or euphoria with the forward PE today at 15 times compared to 24 at its tech boom peak and Nasdaq valuations around one third of tech boom peak levels.

Major global economic events and implications

• US economic data remained messy with soft readings for the Markit services conditions index, consumer confidence, regional manufacturing conditions surveys, mortgage applications (although falls here may be partly seasonal) and jobless claims but a surprisingly strong gain in new home sales, continued strength in home prices which rose 13.4% last year and slightly better than expected durable goods orders after allowing for volatile aircraft orders.  Fed Chair Yellen essentially repeated her message that tapering remains on track but indicated the Fed is trying to get a handle on whether the weather is driving recent soft data or something more worrying, with the implication being that the taper could be delayed or slowed if needed.
• Eurozone confidence indicators confirmed the ongoing economic recovery but weak lending and money supply data highlight the case for more ECB stimulus.
• Japanese activity for data for January was a good with very strong industrial production, a solid PMI pointing to more gains ahead, stronger than expected retail sales and household spending, unemployment remaining down at 3.7%, the job vacancy to applicants ratio rising a bit and core inflation remaining at 0.7% year on year. The main uncertainty though is around to what degree the approaching sales tax hike has pulled demand forward.
• While emerging market uncertainties still linger, it was good to see Brazilian GDP growth come in stronger than expected in the December quarter leaving it up 2.3% for the year. That said Brazil’s growth isn’t what it used to be and structural challenges remain and with the central bank raising interest rates yet again there are still downside risks to Brazilian growth.

Australian economic events and implications

• Australian construction and business investment data was depressingly soft pointing to a broad based fall in investment in the December quarter and intentions data pointing to sharp fall in business investment in 2014-15 as mining investment really starts to wind down. Comparing intentions for 2014-15 with those made a year ago for 2013-14 suggests a 17% fall in investment led by a 25% fall in mining and a 20% fall in manufacturing. However, the final outcome may not be that bad as such an approach looks to have exaggerated weakness this financial year. Secondly, investment intentions in industries outside of mining and manufacturing are starting to stabilise and improve. Thirdly, the impact on overall economic growth of the slump in mining investment will be partly offset by a slump in related imports, just as the mining investment boom was partly offset by surging mining related imports. Finally, while residential investment looks to have fallen in the December quarter, the strength in building approvals points to a strong upturn in dwelling related construction ahead.
• The Australian corporate earnings season has now wrapped up. As is often the case the companies with great results often go first followed by those not doing so well. That said, overall results remain pretty good and confirm the profit cycle has now turned up with large companies, notably the resources and banks, playing a bigger role than normal in driving growth. 54% of companies exceeded expectations (compared to a norm of 43%); 65% of companies have seen their profits rise from a year ago (compared to a norm of 66%); 64% of companies have increased their dividends from a year ago (which is up slightly from around 62% in the last two years); and 56% of companies have seen their share price outperform the day they released results. Key themes have been a massive turnaround for the resources stocks (notably Rio and BHP) leaving the sector on track for circa 40% earnings growth this financial year, banks doing very well (with good results from CBA, ANZ and NAB), help coming through from the lower $A, ongoing cost control making up for still soft revenue growth, signs of improvement from some cyclicals (like Boral, JB Hi Fi, Fairfax and Seek) and strong growth in dividends. A 14% surge in dividends from a year ago was mainly driven by big companies such as Rio, CBA and Telstra. At 64% the dividend payout ratio is still not excessive for the overall market and higher dividends are usually a sign that companies are confident about the outlook. The bottom line is that Australian earnings look to be on track for growth of around 15% this financial year, with a 40% surge in resources’ profits, a 10% rise in financials’ profits and a 6% rise in profits for the rest of the market.

What to watch over the next week?

• In the US, the main focus is likely to be on February manufacturing conditions indicators (due Monday) and employment data (Friday), but unfortunately both are likely to present a confusing picture given poor weather in February. The manufacturing conditions PMIs are likely to present a divergent picture with the ISM index likely coming in around 52 but the broader Markit index remaining solid around 56.7 in line with its advance reading. With a snowstorm affecting some of the US when the February employment survey was undertaken, payroll growth is likely to have remained relatively soft at 150,000 and unemployment is likely to be unchanged at 6.6%.
• In the Eurozone, the ECB (Thursday) is likely to finally act on its easing bias, possibly cutting interest rates a bit further and maybe announcing a form of quantitative easing involving the purchase of bank loans. While GDP is growing again it is still gradual, lending growth remains depressed and there is a risk of deflation. The Bank of England (also Thursday) is likely to leave monetary policy unchanged.
• In China, the National People’s Congress (starting Wednesday) will likely set a growth target for this year of 7.5%, but the key focus will be on the approval and enactment of further financial deregulation and various fiscal, administrative and welfare reforms flowing from the 3rd Plenum last year. Chinese data for February will also start to flow with trade figures (due March 8th) likely to be looked at very closely to see whether the circa 10% growth in exports and imports reported for January continued in February.
• The Reserve Bank of Australia (Tuesday) is expected to leave interest rates on hold for the sixth meeting in a row. The RBA has clearly indicated that with growth remaining low but tentative signs of improvement in some indicators, a period of stability in interest rates is appropriate. Since not enough has really changed since the last meeting, this remains the case. Soft jobs news and the poor business investment outlook do suggest though that our expectation for rate hikes to commence later this year may be premature with the risk being that they won’t occur till next year. Governor Steven’s Parliamentary testimony (Friday) will be watched closely for his views on the jobs and investment front.
•  Meanwhile, there will be a data avalanche in Australia with the AIG manufacturing PMI, house prices, new home sales and ANZ job ads all due Monday, January building approvals likely to gain 1% (Tuesday), December quarter GDP (Wednesday) expected to show just 0.3% quarterly growth (or 2.1% year on year) thanks in part to solid retail sales and trade offsetting poor investment, and retail sales (Thursday) expected to have fallen slightly after eight months of gains.

Outlook for markets

• This year will likely see returns from shares a bit more constrained and volatile than was the case last year, but the trend for share markets is likely to remain up nonetheless reflecting a combination of reasonable valuations, better earnings on the back of improved economic growth and easy monetary conditions helping to entice investors to switch out of cash and bonds and into shares. With the just concluded earnings reporting season in Australia confirming that the market is on track of good earnings growth this year, the ASX 200 is on track to meet our year-end target of around 5800.
• The recent decline in global bond yields should be seen as a correction against the backdrop of a slow rising trend in yields on the back of gradually improving global growth. This will mean subdued returns from government bonds. Cash and bank deposits also continue to offer pretty poor returns given low interest rates/yields.
• The broad trend in the $A remains down on the back of softer commodity prices, a reversion to levels that offset Australia’s relatively high cost base and a decline in Australia’s growth relative to that in the US. However, short positions in the $A still remain excessive and so it could still have a bit more of a bounce before the downtrend resumes.

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 28 February, 2014 appeared first on AdviserVoice.

• The past week was dominated yet again by ongoing noise around when the Fed will start to taper its quantitative easing program. While the news that tapering will likely commence in coming months should hardly be new to anyone it still creates a bit of nervousness. This saw most share markets fall and bond yields rise.
• The basic message from the Minutes from the Fed’s last meeting and various Fed officials including Chairman Bernanke is that: the timing of the start to tapering remains dependent on improved confidence regarding the growth outlook; that if economic conditions improve as the Fed expects it could start in coming months (ie Decembers out to March) and that the Fed is working on strengthening its forward guidance to stress that interest rates will remain low for longer to offset the negative impact on bond yields of cutting back bond purchases. While our base case is for tapering to start early in the New Year as opposed to in December, in reality it’s too close to call and if the November payroll report due in two weeks is strong the odds will clearly favour a December taper, particularly if US politicians reach a budget deal by the December 13 deadline.
• While the prospect of tapering will likely continue to cause concern in financial markets we remain of the view that its impact will be less than many fear. First, it will only occur because the Fed is more confident the US recovery is sustainable. Second, tapering is not tightening as it will just mean a gradual reduction in the amount of asset purchases (maybe from $US85bn a month to $US75bn a month initially). Third, the Fed will likely couple the start to tapering with a move to further push out expectations for the first rate hike. Finally, by the time tapering happens it will be factored into most markets unlike when it was first talked about in May.
• While the Fed is debating when to taper it should be noted that the advanced world is set to have easy or even easier monetary policy for a long time. Bernanke has stressed that tapering does not mean interest rates will rise anytime soon. Moreover, both the ECB and Bank of Japan are on alert to provide more monetary stimulus, not less. This provides a reasonably supportive back drop to investment markets.
• Comments in a speech by RBA Governor Stevens that he is open minded on foreign exchange intervention to lower the $A combined with ongoing taper talk in the US helped push it lower. But it doesn’t look like the RBA is even close to undertaking intervention as Steven’s speech extolled the benefits of the free float, he was not sure by how much the $A is overvalued and he pointed out that intervention is not costless. The mere threat of intervention though helps strengthen the jawboning the RBA is trying to use to push the $A lower. My view remains that the broad trend in the $A is down and this will ultimately see it fall back to around $US0.80 in the years ahead.
• The debt ceiling noise continued in Australia but it’s a non-event for investors. Does the Federal Government’s debt ceiling need to be raised? Yes, as the current $300bn ceiling will be reached next month. Will it be raised? Yes, both sides of politics agree on this. Does it matter if it’s raised to $400bn or $500bn? No, as it will take 3 years or so to reach the $400bn level and once that’s reached it will just be raised again anyway.

Major global economic events and implications

• US economic data continues to point to a possible pickup in economic growth. Retail sales were solid in October despite the government shutdown, the Markit manufacturing conditions PMI rose to a solid 54.3 in November led by strong gains in new orders and production, unemployment claims fell sharply and weekly mortgage applications had a nice bounce. The NAHB homebuilder conditions index held at solid levels but is still down from past cyclical highs. Existing home sales fell again in October but this may have been due to delayed processing due to the shutdown. Meanwhile inflation remains benign with headline inflation falling to 1% year on year, which of course gives the Fed plenty of flexibility.
• The composite Eurozone business conditions PMI disappointingly fell slightly in November, due a fall in the services PMI even though the manufacturing PMI rose slightly. The composite is still well up from its lows, but still points to a slow recovery. It highlights the need for more ECB stimulus, which it seems to be considering.
• A weekend split in Silvio Berlusconi’s party in Italy, suggests the Italian Government is likely to remain stable for now.  As a result Eurozone risk has fallen another notch.
•  In China, the reaction to the detailed Plenum reforms was positive. Meanwhile housing inflation averaged across 70 cities accelerated further to 10.9% over the 12 months to October, but interestingly this masked a 0.1% decline in October itself so maybe it’s starting to slow. HSBC’s flash manufacturing conditions PMI fell slightly in November but remains in a very mild rising trend and points to growth remaining around the 7.5% level, so all ok.

Australian economic events and implications

• The minutes from the Reserve Bank Board’s last meeting added little that was new with the RBA seeing mounting evidence that the economy is responding to lower interest rates and continued benign inflation but noting again that the $A remains “uncomfortably high” and needs to fall. Once more it left open the door to another rate cut but our view remains that given the economy does seem to be responding to past rate cuts and that the full effect is not yet evident the RBA will keep rates on hold ahead of the next move being a rate hike, but not till around September/October next year. It is clear from the minutes though that the RBA is much more concerned about the high $A than rising house prices, which it sees as just the expected effect of low interest rates, all of which makes it clear that the risk is still on the downside for rates.
• Australian economic data was light on with skilled vacancies down but looking like they are stabilising and marginal gains in leading economic indicators put together by Westpac and the Conference Board.

Major market moves

• Share markets were under pressure again from taper talk over the last week, which resulted in a somewhat volatile ride. This didn’t help Australian shares which have also been under a bit of pressure lately due to 14 capital raising requiring about $3.5bn to be raised. Chinese and Japanese shares managed gains though, the former on the back of the Plenum and Japan on the back of renewed weakness in the Yen.
• Commodity prices were mixed, but the $A was pushed lower by a combination of taper talk in the US and more jawboning from the RBA including talk of intervention in the foreign exchange market.
• Bond yields rose virtually everywhere on the back of Fed taper talk.

What to watch over the next week?

• In the US, expect a bounce in pending home sales (Monday) after softness in September and reasonably solid housing starts data (Tuesday) along with continued gains in house prices (also released Tuesday). Expect underlying durable goods orders and consumer sentiment (both Wednesday) to show a bounce.
• Eurozone economic confidence data (Thursday) is likely to confirm that the economic recovery remains very gradual at this stage. Unemployment (Friday) is likely to have remained around 12.2% in October, and November inflation is likely to remain very low at around 0.8% year on year.
• Japanese household spending, labour market data and industrial production (all Friday) will be watched for further evidence that Abenomics is working, with CPI data likely to show further evidence that deflation is ending but that inflation remains very low.
• In Australia, the focus will likely be on September quarter investment data (Thursday) including investment intentions. Business investment in the September quarter is at risk of a fall given a 4% gain in the June quarter and capex plans are likely to confirm that mining investment has peaked and that the outlook for non-mining investment remains weak, but it’s doubtful the investment outlook will have changed much since the last survey three months ago. Meanwhile, September construction data (Wednesday) will also contribute to expectations for September quarter GDP growth. Private credit (Friday) is likely to show continued slow growth.

Outlook for markets

• Shares appear to have hit a consolidation or mild correction phase after very strong gains from early October lows which had left them vulnerable. A bring forward of the potential timing of the start to tapering in the US has largely been the trigger with a rash of capital raising not helping in Australia. However, this is likely just a pause ahead of the resumption of the rising trend as valuations are reasonable, monetary conditions are set to remain very easy and profits are likely to improve next year as global and Australian growth picks up. Australian shares remain on track to hit 5500 or even higher by year end, with a little help from a Santa rally.
• Government bond yields are likely in a gradual upwards trend as the global economy continues to pick up momentum and as Fed tapering eventually occurs. Low yields and an unwinding of years of massive inflows point to poor sovereign bond returns ahead. However, dovish forward guidance from central banks is likely to help ensure the rising trend in yields remains gradual.
• Expect the $A to be buffeted in the short term between signs Australian rates have bottomed and stable growth in China but talk of Fed tapering & RBA jawboning. The medium term trend in the $A is likely to remain down.

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

———————

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

The post Weekly market & economic update week ending 22 November appeared first on AdviserVoice.

• The past week saw a bit of nervousness in investment markets early on regarding the prospects for a Fed tapering in December, as the initial news from the 3^rd Plenum in China disappointed some and economic data was mixed. However, most share markets rose helped by dovish comments from Fed chair nominee Yellen.
• After a huge beat up, the vague nature of the communiqué from the 3rd Plenum in China disappointed some and this initially weighed on the Chinese share market. However, a leaked document to be formally released in the week ahead provided more details and a bit more confidence particularly in terms of faster progress in financial market liberalisation even though its suggests a less ambitious approach to reforming the imbalance between central and local government finances and to rural land ownership. What is clear though is that the focus of the Chinese leadership will be on reforms to allow market forces to play a more decisive role in the economy. However, the reform process will be gradual.
• In the US, fears of an imminent Fed tapering continue to wax and wane following the stronger than expected jobs report and comments from various Fed officials. But the key message seems to be that while tapering is likely to be discussed in December, it’s a long way from being a sure thing with voting Fed Presidents giving the impression that it’s too early and importantly vice-chair Yellen in testimony for her nomination hearing saying the economy is performing short of potential and needs to improve if the Fed is to reduce monetary stimulus. Yellen’s comments don’t preclude a tapering in December (as tapering could simply be offset by more dovish guidance on interest rates) but they do suggest that the probability of a December move is a bit less than 50/50. More broadly she sees the benefits of quantitative easing exceeding the costs, indicated little change in the approach the Fed has pursued under Bernanke and her testimony and the reaction of Senators to it suggests little risk she will not be confirmed.
• More broadly, Janet Yellen’s comments, combined with indications from both the ECB and the Bank of Japan, mean that global monetary conditions will remain very easy through next year. This along with still reasonable valuations and improving global growth means a very positive environment for shares.
• Australian politics descended into a bout of silliness with talk of a Government shutdown should the Federal debt ceiling not be increased. Some Australian politicians seem to be going through a bit of “me tooism” after the shutdown and debt default talk in the US. The bottom line is that whether the debt ceiling is raised to $400bn as the Opposition suggests for now or the $500bn the Government is demanding is on no consequence as Federal debt is only around $275bn at present and unlikely to reach the lower level of $400bn by 2016 or 2017. So forget the shutdown talk – it’s not going to happen. In fact it would make more sense to abolish the ceiling as it has no effect in terms of constraining debt anyway. The issue is a giant ho hum for financial markets.

Major global economic events and implications

• It was a light weak for US economic data but what was released was soft with a fall in small business optimism, a further decline in new mortgage applications a slightly worse than expected trade deficit and only a marginal fall in jobless claims. Good news from a major retailer about sales though helped boost confidence.
• The Eurozone economic recovery continued in the September quarter but only very slowly with a 0.1% quarterly rise after the 0.3% gain in the June quarter. Germany, Spain and Portugal grew slightly but France and Italy contracted slightly. Obviously this is not enough to deal with massive unemployment, high debt levels and falling inflation. Fortunately though the pick-up in business conditions PMIs and confidence measures seen over the last year points to further growth ahead and more monetary easing is likely on the way from the ECB.
• Japanese GDP growth slowed pretty much as expected in the September quarter to 0.5% quarter on quarter from 0.9% in the June quarter on the back of slower growth in consumption and investment. Leading indicators point to a rebound in the current quarter though. Other Japanese data was mixed with a slight fall in confidence and a tertiary activity index but a rising trend in machinery orders and falling bankruptcies.
• Another interest rate hike in Indonesia, along Indian data showing with much weaker than expected industrial production and 10% consumer price inflation highlighted the problems facing some key emerging countries.

Australian economic events and implications

• Australian economic data was mixed with a stronger than expected gain in housing finance, confirming that the housing recovery remains intact, and a rise in consumer confidence but a fall in the NAB’s measure of business confidence and very soft wages growth. Weakness in wages growth is to be expected given the soft labour market and as such is not surprising. What it does mean though is that there is no inflation pressure coming through from labour costs so it helps confirm that there is plenty of scope for a further rate cut if needed. But what is clear though is that the broad bounce in business and consumer confidence remains intact – the NAB measure remains well above recent lows – and construction finance and building approvals indicate the housing recovery includes an upswing in dwelling construction. As such we see the RBA remaining on hold.

Major market moves

• While share markets initially had some wobbles on the back of taper talk in the US and the vague communiqué from the Third Plenum in China they bounced back strongly after dovish comments from Fed chair nominee Yellen and as more details emerged regarding the Plenum. Most share markets saw solid gains, with Australian shares coming in little changed as falls in bank shares weighed a bit.
• Commodity prices were mostly a bit weaker, including the oil price which is being weighed down by increasing US supply. In fact the US produced more crude oil than it imported last month. Soft commodity prices weighed slightly on the $A.
• Bond yields rose in Australia but fell in the US and Europe on the back of Yellen’s dovish comments and mixed economic data.  

What to watch over the next week?

• In the US, attention will likely focus on the release of the minutes from the Fed’s October meeting (Wednesday) for further guidance on the chance of a December tapering. The trouble is that it is now very dated given dovish comments by various Fed officials, particularly by Janet Yellen. On the data front, expect a modest rise in the November NAHB home builders conditions index (Monday) as a result of the ending of the government shutdown, but the shutdown is likely to have weighed on October data due Wednesday for retail sales resulting in just a 0.1% gain and existing homes sales which are expected to have fallen slightly. The preliminary Markit PMI for November (Thursday) is also likely to show a post shutdown bounce. Meanwhile, expect the CPI (also Wednesday) to show inflation running at just 1.1% year on year.
• In the Eurozone the focus will likely be on preliminary November business conditions PMIs (Thursday) which are likely to show a continuing rising trend.
• China’s flash HSBC manufacturing conditions PMI (Thursday) is expected to show a stabilisation around the October reading of 50.9 consistent with continuing solid growth and details from the Plenum will also be scrutinised.
• In Australia, the minutes from the last RBA meeting (Tuesday) will likely confirm that it retains a mild easing bias and that its more concerned about the strong $A than rising house prices at this stage. Attention will focus on the minutes of the RBA’s monthly policy meeting (Tuesday). Speeches by Assistant Governor Debelle (Wednesday) and Governor Stevens (Thursday) will also be watched closely.

Outlook for markets

• After solid gains from early October lows and with technical and sentiment indicators a bit stretched a short term correction or consolidation in shares would not be surprising. However, the trend in shares is likely to remain up as valuations remain reasonable, monetary conditions are set to remain very easy and profits are likely to improve next year as global and Australian growth picks up. Australian shares remain on track to hit 5500 or even higher by year end, with a little help from a Santa rally.
• Government bond yields are likely in a gradual upwards trend as the global economy continues to pick up momentum and as Fed tapering eventually occurs. Low yields and an unwinding of years of massive inflows point to poor sovereign bond returns ahead. However, dovish forward guidance from central banks is likely to ensure the rising trend in yields remains very gradual.
• Expect the $A to be buffeted in the short term between signs Australian rates have bottomed and stable growth in China but talk of Fed tapering & RBA jawboning. The medium term trend in the $A is likely to remain down.

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

————————

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

The post Weekly market & economic update – 15 November 2013 appeared first on AdviserVoice.