AdviserVoiceUS tapering Archives - AdviserVoice https://www.adviservoice.com.au/tag/us-tapering/ Financial planner information & financial planner education/CPD - AdviserVoice Mon, 27 Jul 2026 09:08:33 +0000 en-US hourly 1 https://wordpress.org/?v=7.0.2 The Federal Reserve is many things https://www.adviservoice.com.au/2014/03/federal-reserve-many-things/ https://www.adviservoice.com.au/2014/03/federal-reserve-many-things/#respond Sun, 02 Mar 2014 21:00:05 +0000 https://adviservoice.com.au/?p=28450 The impact of tapering on global markets.

The impact of tapering on global markets.

Ben Bernanke on January 28 and 29 presided over his last policy-setting meeting as chairman of the Federal Reserve, before leaving the central bank two days later.

As expected, the policy-setting board decided to reduce the Fed’s monthly asset purchases by another US$10 billion from this month.

The Fed issued a statement of 790 words to justify its decision to yet again “taper” its quantitative-easing program. Most of the text focused on the US labour market, US inflation projections and the Fed’s assurances that US monetary policy will stay lax enough to support US economic growth even as its asset purchases drop. Not one word hinted that there was another country on earth.[1]

The lack of acknowledgement of the rest of the world may have astonished some. Over the previous weeks the Fed triggered disarray on global stock and currency markets when it implemented its first US$10 billion drop in monthly asset purchases from US$85 billion. Emerging-market currencies were engulfed in the most turmoil as investors pulled money from developing-country securities to send it largely back to the US to take advantage of higher-yielding US Treasuries. People who view the Fed as the world’s de facto central bank may have been surprised that Fed policy-board members failed to take these consequences into account before deciding to trim their asset purchases again.

They shouldn’t have been. The Fed is not the world’s central bank. It is as parochial as any other central bank when it comes to making decisions. Its mandate from Congress rightly only covers achieving outcomes for the US economy; namely, stable prices, full employment and the largely overlooked goal of moderate long-term interest rates. The Fed is there to conduct US monetary policy, act as banker for the US government and other US and foreign official financial institutions, operate and oversee the payments system, supervise and maintain the stability of the financial system and conduct research, among other things. It’s not there to worry about economic conditions in other countries unless turmoil elsewhere threatens the US economy. This sanguine approach by the Fed to any havoc created by its tapering has profound implications for the world economy.

To be sure, Fed officials do care about some pricing on financial markets, as the Fed’s statement in January points out. They mostly watch yields on US fixed-income markets because they have such telling economic impact; and they care to some extent what happens to US stocks for the flow-on effect to consumer sentiment and purchasing power. The Fed’s tapering is not the sole cause of the recent turmoil anyway – China’s credit tightening is hindering the world’s second-biggest economy, Argentina would have hosted a currency crisis anyway as its inflation is already out of control and political unrest is gripping Thailand, Turkey and Ukraine. Policymakers in some countries including Australia are glad the Fed’s tapering is boosting the US dollar because they want lower currencies to help their exporters. The policymakers bleating loudest about the ending of quantitative easing are often those who protested loudest when it began, claiming the Fed was starting currency wars. Perhaps, the Fed’s statement could have had a few sops acknowledging the turmoil in emerging countries.

But those words would ring hollow anyway to citizens in those emerging markets battered by the Fed’s tapering. People in these countries can guess that Fed officials have calculated that tapering is yet to trigger global side effects that will touch the US economy. Damage on financial markets would need to be far greater. Few emerging countries are key US export markets. US banks are not exposed to any large extent to falling emerging-market debt. In fact, the emerging-market turmoil has lowered US bond yields, making it easier for the Fed to persist with tapering, rather than put more pressure on it to suspend its timetable to end its asset purchases before year end. That was the likely message in Bernanke’s decision to make no mention of the outside world when justifying January’s decision.

Expanding list

Many implications flow from the Fed’s reminder that it is not a global welfare agency. The most obvious is that the Fed will steadily prune its asset buying as long as the US economy can withstand reduced purchases. Many in the US want the Fed to shrink its balance sheet. They are concerned that the Fed’s decision to more than double its balance sheet since 2009 to buy assets is fanning bubbles (perhaps) and could reignite inflation (unlikely). The US economic recovery appears solid enough even if hidden employment is high, Congress needs to again raise the US debt limit and factory orders suffered their steepest drop for 33 years in January (due, most probably, to a cold snap and previous stockpiling). Thus emerging markets can expect a struggle to hold onto the capital flows that came their way when the Fed, having reduced the cash rate to almost zero, began buying assets five years ago to reduce long-term US interest rates to spur the US economy.

The emerging markets most vulnerable to the Fed’s actions are those confronting political uncertainty and those with weak economic fundamentals. What started out as the “fragile five” – Brazil, India, Indonesia, Turkey and South Africa – has already expanded to become the “fragile eight” – Argentina, Chile and Russia have been added – and the roll threatens to grow. (Some include Hungary among the fragile rather than Chile.) Political strife on Ankara, Bangkok and Kiev streets and upcoming local, general and/or presidential elections in India, Indonesia and Turkey have prompted investors to pull money from these places. On top of political uncertainty, these and the other wobbly countries are vilified for their large current-account deficits, declining forex reserves, sluggish economic growth, hefty fiscal deficits and inflation. The Bank of International Settlements warned that the “massive expansion” by banks and companies in developing countries to sell bonds leaves emerging markets more exposed to the whims of foreign investors than they were during the East Asia crisis in 1998.[2]

A big problem is how emerging countries are responding to the loss of capital and the resultant dive in their currencies. Countries such as Brazil, India, Indonesia, South Africa and Turkey are defending currencies by raising interest rates – some such as Argentina and Ukraine have imposed capital controls while Russia is blowing forex reserves. After years of overly lax monetary policies in these countries, central banks are acting prudently to some extent to prevent plunging currencies boosting inflation. But for most part they are wrecking short-term growth prospects, putting their banking systems under pressure and stand little chance of propping up currencies for too long anyway. So worried are policymakers about holding onto foreign capital that even emerging markets with current-account surpluses (such as Chile and Peru) are wary of cutting key rates to stimulate their slowing economies.

Fed nemesis

The emerging countries deemed fragile are being urged to abandon the populist macroeconomic policies of recent years (low rates, fiscal deficits, prioritising growth over fighting inflation and anti-free-trade policies) and undertake structural reforms to win back the confidence of foreigners. They have much to do to convince outsiders that they have the political will to fix government finances, control banking sectors, stimulate domestic competition, boost productivity and encourage direct foreign investment. Over the long term, these countries probably will address many of their shortcomings and rebuild faith in the still-sound, long-term case for emerging markets. But the short term is another matter. A sudden slowdown is taking place in many emerging markets. That it is happening in so many large emerging markets at once is akin to a global disinflationary shock – as the prices of commodities and manufactured goods decline – particularly so if China pushes down the yuan to hold onto export-market share as it battles the aftermath of a credit boom.

Tamer inflation will be one beneficial outcome from the crisis for the fragile emerging countries infested with this curse. But a wave of disinflationary pressure from the emerging world is a big threat to the rest of the world. Japan will face a tougher struggle to escape its deflation. The heavily indebted eurozone could be pushed into the Japan-like daze, given how close it is to this stupor anyway. Prices in the 18-member eurozone only rose 0.7% in the 12 months to January, mainly because the fixed nature of the euro for its users is forcing countries with current-account deficits to deflate their economies to become competitive again. Deflation on an annual basis has already taken hold in the troubled countries of Greece, Cyprus and new euro-user Latvia and inflation is close to zero in Ireland, Slovakia, Spain and Portugal. Even if inflation stays just above zero in the eurozone, inflationary expectations have probably fallen low enough to drive up the real burden of debt to problematic levels.

Deflation is the menace the Fed probably worries about the most when judging whether a sick world could infect the US economy. Consumer prices only rose 1.5% in the US in 2013, so the margin for preventing the US economy entering into a long-term coma that worsens debt ratios is not huge. As much as the US might sometimes pretend it’s a closed economy, the outside world is still there. It could even crack a mention in Fed statements later this year if  new Chair Janet Yellen needs to explain why the US central bank has suspended tapering – for the sake of the US economy, of course.

Financial information comes from Bloomberg unless stated otherwise. Eurozone data comes from eurostat.

by Michael Collins, Investment Commentator at Fidelity

———-

[1] Federal Reserve. FMOC statement. Press release. 29 January 2014. http://www.federalreserve.gov/newsevents/press/monetary/20140129a.htm

[2] Bank of International Settlements. Working Papers No 441. “The global long-term interest rate, financial risks and policy choices in EMEs.” February 2014. Page 4. http://www.bis.org/publ/work441.htm

]]> The impact of tapering on global markets.

The impact of tapering on global markets.

Ben Bernanke on January 28 and 29 presided over his last policy-setting meeting as chairman of the Federal Reserve, before leaving the central bank two days later.

As expected, the policy-setting board decided to reduce the Fed’s monthly asset purchases by another US$10 billion from this month.

The Fed issued a statement of 790 words to justify its decision to yet again “taper” its quantitative-easing program. Most of the text focused on the US labour market, US inflation projections and the Fed’s assurances that US monetary policy will stay lax enough to support US economic growth even as its asset purchases drop. Not one word hinted that there was another country on earth.[1]

The lack of acknowledgement of the rest of the world may have astonished some. Over the previous weeks the Fed triggered disarray on global stock and currency markets when it implemented its first US$10 billion drop in monthly asset purchases from US$85 billion. Emerging-market currencies were engulfed in the most turmoil as investors pulled money from developing-country securities to send it largely back to the US to take advantage of higher-yielding US Treasuries. People who view the Fed as the world’s de facto central bank may have been surprised that Fed policy-board members failed to take these consequences into account before deciding to trim their asset purchases again.

They shouldn’t have been. The Fed is not the world’s central bank. It is as parochial as any other central bank when it comes to making decisions. Its mandate from Congress rightly only covers achieving outcomes for the US economy; namely, stable prices, full employment and the largely overlooked goal of moderate long-term interest rates. The Fed is there to conduct US monetary policy, act as banker for the US government and other US and foreign official financial institutions, operate and oversee the payments system, supervise and maintain the stability of the financial system and conduct research, among other things. It’s not there to worry about economic conditions in other countries unless turmoil elsewhere threatens the US economy. This sanguine approach by the Fed to any havoc created by its tapering has profound implications for the world economy.

To be sure, Fed officials do care about some pricing on financial markets, as the Fed’s statement in January points out. They mostly watch yields on US fixed-income markets because they have such telling economic impact; and they care to some extent what happens to US stocks for the flow-on effect to consumer sentiment and purchasing power. The Fed’s tapering is not the sole cause of the recent turmoil anyway – China’s credit tightening is hindering the world’s second-biggest economy, Argentina would have hosted a currency crisis anyway as its inflation is already out of control and political unrest is gripping Thailand, Turkey and Ukraine. Policymakers in some countries including Australia are glad the Fed’s tapering is boosting the US dollar because they want lower currencies to help their exporters. The policymakers bleating loudest about the ending of quantitative easing are often those who protested loudest when it began, claiming the Fed was starting currency wars. Perhaps, the Fed’s statement could have had a few sops acknowledging the turmoil in emerging countries.

But those words would ring hollow anyway to citizens in those emerging markets battered by the Fed’s tapering. People in these countries can guess that Fed officials have calculated that tapering is yet to trigger global side effects that will touch the US economy. Damage on financial markets would need to be far greater. Few emerging countries are key US export markets. US banks are not exposed to any large extent to falling emerging-market debt. In fact, the emerging-market turmoil has lowered US bond yields, making it easier for the Fed to persist with tapering, rather than put more pressure on it to suspend its timetable to end its asset purchases before year end. That was the likely message in Bernanke’s decision to make no mention of the outside world when justifying January’s decision.

Expanding list

Many implications flow from the Fed’s reminder that it is not a global welfare agency. The most obvious is that the Fed will steadily prune its asset buying as long as the US economy can withstand reduced purchases. Many in the US want the Fed to shrink its balance sheet. They are concerned that the Fed’s decision to more than double its balance sheet since 2009 to buy assets is fanning bubbles (perhaps) and could reignite inflation (unlikely). The US economic recovery appears solid enough even if hidden employment is high, Congress needs to again raise the US debt limit and factory orders suffered their steepest drop for 33 years in January (due, most probably, to a cold snap and previous stockpiling). Thus emerging markets can expect a struggle to hold onto the capital flows that came their way when the Fed, having reduced the cash rate to almost zero, began buying assets five years ago to reduce long-term US interest rates to spur the US economy.

The emerging markets most vulnerable to the Fed’s actions are those confronting political uncertainty and those with weak economic fundamentals. What started out as the “fragile five” – Brazil, India, Indonesia, Turkey and South Africa – has already expanded to become the “fragile eight” – Argentina, Chile and Russia have been added – and the roll threatens to grow. (Some include Hungary among the fragile rather than Chile.) Political strife on Ankara, Bangkok and Kiev streets and upcoming local, general and/or presidential elections in India, Indonesia and Turkey have prompted investors to pull money from these places. On top of political uncertainty, these and the other wobbly countries are vilified for their large current-account deficits, declining forex reserves, sluggish economic growth, hefty fiscal deficits and inflation. The Bank of International Settlements warned that the “massive expansion” by banks and companies in developing countries to sell bonds leaves emerging markets more exposed to the whims of foreign investors than they were during the East Asia crisis in 1998.[2]

A big problem is how emerging countries are responding to the loss of capital and the resultant dive in their currencies. Countries such as Brazil, India, Indonesia, South Africa and Turkey are defending currencies by raising interest rates – some such as Argentina and Ukraine have imposed capital controls while Russia is blowing forex reserves. After years of overly lax monetary policies in these countries, central banks are acting prudently to some extent to prevent plunging currencies boosting inflation. But for most part they are wrecking short-term growth prospects, putting their banking systems under pressure and stand little chance of propping up currencies for too long anyway. So worried are policymakers about holding onto foreign capital that even emerging markets with current-account surpluses (such as Chile and Peru) are wary of cutting key rates to stimulate their slowing economies.

Fed nemesis

The emerging countries deemed fragile are being urged to abandon the populist macroeconomic policies of recent years (low rates, fiscal deficits, prioritising growth over fighting inflation and anti-free-trade policies) and undertake structural reforms to win back the confidence of foreigners. They have much to do to convince outsiders that they have the political will to fix government finances, control banking sectors, stimulate domestic competition, boost productivity and encourage direct foreign investment. Over the long term, these countries probably will address many of their shortcomings and rebuild faith in the still-sound, long-term case for emerging markets. But the short term is another matter. A sudden slowdown is taking place in many emerging markets. That it is happening in so many large emerging markets at once is akin to a global disinflationary shock – as the prices of commodities and manufactured goods decline – particularly so if China pushes down the yuan to hold onto export-market share as it battles the aftermath of a credit boom.

Tamer inflation will be one beneficial outcome from the crisis for the fragile emerging countries infested with this curse. But a wave of disinflationary pressure from the emerging world is a big threat to the rest of the world. Japan will face a tougher struggle to escape its deflation. The heavily indebted eurozone could be pushed into the Japan-like daze, given how close it is to this stupor anyway. Prices in the 18-member eurozone only rose 0.7% in the 12 months to January, mainly because the fixed nature of the euro for its users is forcing countries with current-account deficits to deflate their economies to become competitive again. Deflation on an annual basis has already taken hold in the troubled countries of Greece, Cyprus and new euro-user Latvia and inflation is close to zero in Ireland, Slovakia, Spain and Portugal. Even if inflation stays just above zero in the eurozone, inflationary expectations have probably fallen low enough to drive up the real burden of debt to problematic levels.

Deflation is the menace the Fed probably worries about the most when judging whether a sick world could infect the US economy. Consumer prices only rose 1.5% in the US in 2013, so the margin for preventing the US economy entering into a long-term coma that worsens debt ratios is not huge. As much as the US might sometimes pretend it’s a closed economy, the outside world is still there. It could even crack a mention in Fed statements later this year if  new Chair Janet Yellen needs to explain why the US central bank has suspended tapering – for the sake of the US economy, of course.

Financial information comes from Bloomberg unless stated otherwise. Eurozone data comes from eurostat.

by Michael Collins, Investment Commentator at Fidelity

———-

[1] Federal Reserve. FMOC statement. Press release. 29 January 2014. http://www.federalreserve.gov/newsevents/press/monetary/20140129a.htm

[2] Bank of International Settlements. Working Papers No 441. “The global long-term interest rate, financial risks and policy choices in EMEs.” February 2014. Page 4. http://www.bis.org/publ/work441.htm

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]]> https://www.adviservoice.com.au/2014/03/federal-reserve-many-things/feed/ 0 Tapering: Where others see risk, William Blair sees opportunity https://www.adviservoice.com.au/2014/02/tapering-others-see-risk-william-blair-sees-opportunity/ https://www.adviservoice.com.au/2014/02/tapering-others-see-risk-william-blair-sees-opportunity/#respond Wed, 26 Feb 2014 20:35:21 +0000 https://adviservoice.com.au/?p=28436 US tapering presents investment opportunities: William Blair

US tapering presents investment opportunities: William Blair

Fears of stability across the globe around tapering are creating significant investment opportunities in countries like India, Thailand, the Ukraine, Venezuela and Argentina, according to William Blair’s Head of Dynamic Allocation Strategies (DAS), Brian Singer.

On a visit to Australia to promote William Blair’s DAS to institutional investors last week, Mr Singer said geopolitical events do not tend to change the valuation of assets or the value of currencies.  “Risks are definitely out there, but the developments are creating opportunities,” he said. “These events significantly motivate prices away from or towards fundamental value.”

Mr Singer said William Blair’s DAS team assesses each individual geopolitical situation, to decide whether the opportunity is adequately compensating for the risk that is introduced. “What we are doing is taking some of the risk away from just being exposed to the market and adding risk that is uncorrelated to the currency,” he said. “India became our largest position when Raghuram Rajan became the Governor of the Reserve Bank of India in August 2013.”

India is still the William Blair DAS team’s largest position due to a significant interest rate differential and because the currency is cheap relative to its fundamental value. “It looks to be a great opportunity going forward, and a great diversifier for portfolios.”

Mr Singer said the first port of call for the William Blair DAS team in deciding to invest in equity markets, bond markets and currencies all over the world, is to determine fundamental value. “We look for prices that revert back to fundamental value over time,” he said. “Within the current geopolitically unstable environment, there are a lot of strategic negotiations and it is important to understand those negotiations and the behaviours of the players as that pushes prices around.“

On currencies, Mr Singer’s said the William Blair DAS team estimates the value of the Australian dollar at about $0.65-$0.70 to the US dollar. “So it’s a long way away from fundamental value,” he said. “We are short and we are short most of the commodity currencies for a number of reasons. First of all because we believe commodity super-cycles have led investors to push prices up above fundamental values and secondly because we see the opportunity for those prices to revert back to fundamental value as commodity prices come down.”

]]> US tapering presents investment opportunities: William Blair

US tapering presents investment opportunities: William Blair

Fears of stability across the globe around tapering are creating significant investment opportunities in countries like India, Thailand, the Ukraine, Venezuela and Argentina, according to William Blair’s Head of Dynamic Allocation Strategies (DAS), Brian Singer.

On a visit to Australia to promote William Blair’s DAS to institutional investors last week, Mr Singer said geopolitical events do not tend to change the valuation of assets or the value of currencies.  “Risks are definitely out there, but the developments are creating opportunities,” he said. “These events significantly motivate prices away from or towards fundamental value.”

Mr Singer said William Blair’s DAS team assesses each individual geopolitical situation, to decide whether the opportunity is adequately compensating for the risk that is introduced. “What we are doing is taking some of the risk away from just being exposed to the market and adding risk that is uncorrelated to the currency,” he said. “India became our largest position when Raghuram Rajan became the Governor of the Reserve Bank of India in August 2013.”

India is still the William Blair DAS team’s largest position due to a significant interest rate differential and because the currency is cheap relative to its fundamental value. “It looks to be a great opportunity going forward, and a great diversifier for portfolios.”

Mr Singer said the first port of call for the William Blair DAS team in deciding to invest in equity markets, bond markets and currencies all over the world, is to determine fundamental value. “We look for prices that revert back to fundamental value over time,” he said. “Within the current geopolitically unstable environment, there are a lot of strategic negotiations and it is important to understand those negotiations and the behaviours of the players as that pushes prices around.“

On currencies, Mr Singer’s said the William Blair DAS team estimates the value of the Australian dollar at about $0.65-$0.70 to the US dollar. “So it’s a long way away from fundamental value,” he said. “We are short and we are short most of the commodity currencies for a number of reasons. First of all because we believe commodity super-cycles have led investors to push prices up above fundamental values and secondly because we see the opportunity for those prices to revert back to fundamental value as commodity prices come down.”

The post Tapering: Where others see risk, William Blair sees opportunity appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2014/02/tapering-others-see-risk-william-blair-sees-opportunity/feed/ 0 Weekly market & economic update – week ending 13 December https://www.adviservoice.com.au/2013/12/weekly-market-economic-update-week-ending-13-december/ https://www.adviservoice.com.au/2013/12/weekly-market-economic-update-week-ending-13-december/#respond Sun, 15 Dec 2013 20:55:20 +0000 https://adviservoice.com.au/?p=27310 Key events of the past week and implications
  • US taper talk yet again dominated over the past week, as a US budget deal and more strong economic data was seen as boosting the probability of a tapering in the week ahead. This saw US bond yields rise and global share markets remain under pressure. Australian shares have particularly been under pressure thanks to a combination of tapering fears weighing on high yield shares like banks, the ongoing drain from capital raisings, several profit warnings, foreign investors selling or staying away until the $A stabilises and news that Holden will end local production after 2017 not helping sentiment.
  • Our assessment is that it’s still 50/50 as to whether the Fed will announce tapering in the week ahead. The case for a December taper is that US labour market looks stronger and fiscal risks have diminished with the budget deal. Against this though inflation remains very low, Bernanke and Yellen may prefer to see a bit more certainty that recent strength will be sustained and the Fed may prefer to start to tapering when financial market liquidity is stronger rather than just before Christmas. I kind of think they should just bite the bullet and start the process to put an end to the “will they taper or not” soap opera!
  • However, whether it’s in the week ahead or early next year, I remain of the view that Fed tapering is not a major threat for investors, apart from a bit of short term volatility. First, it will only occur because the Fed is more confident the US recovery is sustainable. In other words it should be reason for celebration. 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 of tapering with a move to further push out expectations for the first rate hike. Finally, when it happens it will be well and truly factored into most markets. As such it could turn out to be a case of “sell on the rumour, buy on the fact”.
  • The bipartisan US budget deal is very positive. Not only does it signal a small fiscal easing next year, but it means no risk of shutdowns for almost the next two years and improved Congressional cooperation signals reduced political uncertainty, including around the debt ceiling that needs to be increased again early next year.
  • In Australia, news that Holden will cease car production after 2017 is terrible for auto industry workers and sad for people like me who like to own and drive Holden cars. From a broader economic perspective there is a real risk that, given the iconic status of Holden, the announcement will dampen confidence. In this sense the timing is not good. However, the impact on the overall economy of Holden’s demise should not be exaggerated. First the impact will be spread over time. Second, direct job losses of 2900 and total losses of maybe 15,000 are tiny compared to total Australian employment of 11.6 million people (just 0.1%). Third, this impact is likely to be reduced by government assistance programs and if other producers take over some of Holden’s plants. Fourthly, while Holden’s demise adds to the manufacturing sector’s woes, it should be noted that manufacturing has been in decline for 50 year or so. Back in 1960 manufacturing employed 26% of the workforce and now it’s just 8%. And yet the economy has performed well despite this. Finally, we need to accept that government assistance of the auto industry was not a good use of taxpayers’ money. It can now be re-directed to well-targeted infrastructure spending which is what the economy really needs.
  • The past week marked the 30th anniversary of the $A float. Its swings over the last 30 years have been a great shock absorber for the economy and a catalyst for economic reforms. Right now its direction is down. To help the economy adjust as the commodity boom slows, RBA Governor Steven’s wants to see the $A at $US0.85, I would prefer $US0.80 but it’s all in the same direction, ie down. More broadly Steven’s comments in an interview indicate a degree of comfort with current rate settings as the focus remains on getting the $A down.

Major global economic events and implications

  • US data continues to point to improving growth. Retail sales rose strongly in November indicating a good start to holiday sales, job vacancies rose to a five year high and rising wealth will help add to spending.
  • Eurozone economic data disappointed with industrial production falling more than expected in October.
  • Japanese data provided more evidence that Abenomics is working with improved confidence readings, the Manpower employment outlook survey at a five year high and M2 money supply growth at its fastest since 1999.
  • Chinese data for November was benign with industrial production and investment slowing a notch but retail sales accelerating and all remaining solid consistent with 7.5% or so GDP growth. Meanwhile lending growth was a bit stronger than expected but with non-food inflation at just 1.6% there is little pressure on the central bank to tighten aggressively. Uncertainty over policy tightening to slow the shadow banking system may linger though.
  • Indian data was poor with falling industrial production and rising inflation. Strong gains for the opposition BJP in state elections provided a bit of support to the Indian share market though on the grounds that it augured well for the BJP in next year’s national elections which in turn could usher in economic reforms.

Australian economic events and implications

  • Australian economic data was messy. Consumer sentiment fell but remained in a rising trend. The NAB’s business survey showed a slight improvement in conditions but a marginal fall in confidence – but at least both well up from their lows. The November jobs report was confusing with a stronger than expected jobs gain but rising unemployment and falling hours worked highlighting that the jobs market remains weak. Against this, housing finance continued to surge higher in October both for owner occupiers and investors and also for construction indicating the housing recovery continues. This is a positive sign for broader economic growth.

Major market moves

  • It was another messy weak for share markets with tapering fears dominating globally and Australian shares hit again by the combination of global weakness, capital raisings, the falling $A which acts to keep foreign investors away and the announcement that Holden will cease production not helping confidence.
  • The $A continued to slide on the combination of taper talk, more jawboning from RBA Governor Stevens and Holden’s production demise providing another reminder it is still too high.
  • Bond yields rose in the US and China but were flat to down elsewhere

What to watch over the next week?

  • Globally, the week ahead will see all eyes on the US Federal Reserve (Wednesday) to see whether it starts slowing its quantitative easing program. We would not be at all surprised to see the Fed start tapering in the week ahead as it’s now a 50/50 call.
  • Apart from the taper decision in the US, expect the flash Market PMI (Monday) along with various regional manufacturing surveys to remain solid, CPI inflation (Tuesday) to have remained benign, the NAHB homebuilders conditions index (Tuesday) to show a slight gain and housing starts (Wednesday) to be strong.
  • In the Eurozone, expect flash PMIs (Monday) to remain consistent with a gradual recovery.
  • In Japan, the Tankan business survey (Monday) is expected to show further signs of improved growth.
  • China’s flash HSBC PMI (Monday) is expected to remain consistent with growth remaining around 7.5%.  
  • In Australia, the Federal Government will release its mid-year budget review on Tuesday which will likely show a further blowout in the budget deficit for this financial year to around $50bn as a result of the RBA recapitalisation and more revenue slippage. Minutes from the RBA’s last rate setting meeting (also Tuesday) are likely to reiterate that it retains an easing bias but that it is not close to acting on it given recent signs of improvement in economic data. Parliamentary testimony by Governor Stevens will likely reiterate the same message and provide another opportunity for more $A jawboning.

Outlook for markets

  • Fed taper talk and still high short term sentiment readings regarding US and global shares suggest that the share market correction could have a bit further to run. Capital raisings and the falling $A are not helping Australian shares right now. However, we remain of the view that this is just a pause ahead of the resumption of the rising trend as share market valuations are reasonable, monetary conditions are set to remain very easy despite Fed tapering, profits will improve next year as global & Australian growth picks up and there is still a lot of money sitting in cash and bond funds. Australian banks are now back to offering grossed up yields around 8% and so are starting to look pretty attractive again given that term deposit rates of around 3.5 to 4% are continuing to slide. Note that the first half of December is often flattish for shares with the Santa rally usually starting around Christmas and we expect the same to occur this time around. Next year the combination of stronger profits and low interest rates are likely to see the Australian ASX 200 push up to around 5800.
  • 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 but talk of Fed tapering and RBA jawboning. It’s ultimately on its way down to around $US0.80.

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.
]]> Key events of the past week and implications
  • US taper talk yet again dominated over the past week, as a US budget deal and more strong economic data was seen as boosting the probability of a tapering in the week ahead. This saw US bond yields rise and global share markets remain under pressure. Australian shares have particularly been under pressure thanks to a combination of tapering fears weighing on high yield shares like banks, the ongoing drain from capital raisings, several profit warnings, foreign investors selling or staying away until the $A stabilises and news that Holden will end local production after 2017 not helping sentiment.
  • Our assessment is that it’s still 50/50 as to whether the Fed will announce tapering in the week ahead. The case for a December taper is that US labour market looks stronger and fiscal risks have diminished with the budget deal. Against this though inflation remains very low, Bernanke and Yellen may prefer to see a bit more certainty that recent strength will be sustained and the Fed may prefer to start to tapering when financial market liquidity is stronger rather than just before Christmas. I kind of think they should just bite the bullet and start the process to put an end to the “will they taper or not” soap opera!
  • However, whether it’s in the week ahead or early next year, I remain of the view that Fed tapering is not a major threat for investors, apart from a bit of short term volatility. First, it will only occur because the Fed is more confident the US recovery is sustainable. In other words it should be reason for celebration. 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 of tapering with a move to further push out expectations for the first rate hike. Finally, when it happens it will be well and truly factored into most markets. As such it could turn out to be a case of “sell on the rumour, buy on the fact”.
  • The bipartisan US budget deal is very positive. Not only does it signal a small fiscal easing next year, but it means no risk of shutdowns for almost the next two years and improved Congressional cooperation signals reduced political uncertainty, including around the debt ceiling that needs to be increased again early next year.
  • In Australia, news that Holden will cease car production after 2017 is terrible for auto industry workers and sad for people like me who like to own and drive Holden cars. From a broader economic perspective there is a real risk that, given the iconic status of Holden, the announcement will dampen confidence. In this sense the timing is not good. However, the impact on the overall economy of Holden’s demise should not be exaggerated. First the impact will be spread over time. Second, direct job losses of 2900 and total losses of maybe 15,000 are tiny compared to total Australian employment of 11.6 million people (just 0.1%). Third, this impact is likely to be reduced by government assistance programs and if other producers take over some of Holden’s plants. Fourthly, while Holden’s demise adds to the manufacturing sector’s woes, it should be noted that manufacturing has been in decline for 50 year or so. Back in 1960 manufacturing employed 26% of the workforce and now it’s just 8%. And yet the economy has performed well despite this. Finally, we need to accept that government assistance of the auto industry was not a good use of taxpayers’ money. It can now be re-directed to well-targeted infrastructure spending which is what the economy really needs.
  • The past week marked the 30th anniversary of the $A float. Its swings over the last 30 years have been a great shock absorber for the economy and a catalyst for economic reforms. Right now its direction is down. To help the economy adjust as the commodity boom slows, RBA Governor Steven’s wants to see the $A at $US0.85, I would prefer $US0.80 but it’s all in the same direction, ie down. More broadly Steven’s comments in an interview indicate a degree of comfort with current rate settings as the focus remains on getting the $A down.

Major global economic events and implications

  • US data continues to point to improving growth. Retail sales rose strongly in November indicating a good start to holiday sales, job vacancies rose to a five year high and rising wealth will help add to spending.
  • Eurozone economic data disappointed with industrial production falling more than expected in October.
  • Japanese data provided more evidence that Abenomics is working with improved confidence readings, the Manpower employment outlook survey at a five year high and M2 money supply growth at its fastest since 1999.
  • Chinese data for November was benign with industrial production and investment slowing a notch but retail sales accelerating and all remaining solid consistent with 7.5% or so GDP growth. Meanwhile lending growth was a bit stronger than expected but with non-food inflation at just 1.6% there is little pressure on the central bank to tighten aggressively. Uncertainty over policy tightening to slow the shadow banking system may linger though.
  • Indian data was poor with falling industrial production and rising inflation. Strong gains for the opposition BJP in state elections provided a bit of support to the Indian share market though on the grounds that it augured well for the BJP in next year’s national elections which in turn could usher in economic reforms.

Australian economic events and implications

  • Australian economic data was messy. Consumer sentiment fell but remained in a rising trend. The NAB’s business survey showed a slight improvement in conditions but a marginal fall in confidence – but at least both well up from their lows. The November jobs report was confusing with a stronger than expected jobs gain but rising unemployment and falling hours worked highlighting that the jobs market remains weak. Against this, housing finance continued to surge higher in October both for owner occupiers and investors and also for construction indicating the housing recovery continues. This is a positive sign for broader economic growth.

Major market moves

  • It was another messy weak for share markets with tapering fears dominating globally and Australian shares hit again by the combination of global weakness, capital raisings, the falling $A which acts to keep foreign investors away and the announcement that Holden will cease production not helping confidence.
  • The $A continued to slide on the combination of taper talk, more jawboning from RBA Governor Stevens and Holden’s production demise providing another reminder it is still too high.
  • Bond yields rose in the US and China but were flat to down elsewhere

What to watch over the next week?

  • Globally, the week ahead will see all eyes on the US Federal Reserve (Wednesday) to see whether it starts slowing its quantitative easing program. We would not be at all surprised to see the Fed start tapering in the week ahead as it’s now a 50/50 call.
  • Apart from the taper decision in the US, expect the flash Market PMI (Monday) along with various regional manufacturing surveys to remain solid, CPI inflation (Tuesday) to have remained benign, the NAHB homebuilders conditions index (Tuesday) to show a slight gain and housing starts (Wednesday) to be strong.
  • In the Eurozone, expect flash PMIs (Monday) to remain consistent with a gradual recovery.
  • In Japan, the Tankan business survey (Monday) is expected to show further signs of improved growth.
  • China’s flash HSBC PMI (Monday) is expected to remain consistent with growth remaining around 7.5%.  
  • In Australia, the Federal Government will release its mid-year budget review on Tuesday which will likely show a further blowout in the budget deficit for this financial year to around $50bn as a result of the RBA recapitalisation and more revenue slippage. Minutes from the RBA’s last rate setting meeting (also Tuesday) are likely to reiterate that it retains an easing bias but that it is not close to acting on it given recent signs of improvement in economic data. Parliamentary testimony by Governor Stevens will likely reiterate the same message and provide another opportunity for more $A jawboning.

Outlook for markets

  • Fed taper talk and still high short term sentiment readings regarding US and global shares suggest that the share market correction could have a bit further to run. Capital raisings and the falling $A are not helping Australian shares right now. However, we remain of the view that this is just a pause ahead of the resumption of the rising trend as share market valuations are reasonable, monetary conditions are set to remain very easy despite Fed tapering, profits will improve next year as global & Australian growth picks up and there is still a lot of money sitting in cash and bond funds. Australian banks are now back to offering grossed up yields around 8% and so are starting to look pretty attractive again given that term deposit rates of around 3.5 to 4% are continuing to slide. Note that the first half of December is often flattish for shares with the Santa rally usually starting around Christmas and we expect the same to occur this time around. Next year the combination of stronger profits and low interest rates are likely to see the Australian ASX 200 push up to around 5800.
  • 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 but talk of Fed tapering and RBA jawboning. It’s ultimately on its way down to around $US0.80.

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.

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