• Share markets were mixed over the past week with good economic data propelling the US share market to record highs and hopes of more ECB stimulus helping in Europe, but with soft data and profits weighing in Japan and Australia and increased Ukraine tensions weighing across the board. Bond yields generally fell back again on the prospect of more monetary stimulus in Europe. While the gold price rose slightly, oil and metal prices fell. Notable on the commodity front has been the renewed fall in the iron ore price partly on the back of worries about the Chinese housing market. Despite this, the seemingly Teflon coated Australian dollar rose over the week.
• The somewhat messy and desynchronised global growth environment remains clearly evident with good news out of the US, but Europe and Japanese data disappointing and geopolitical issues continuing to hover in the background. This all means occasional bouts of uncertainty for investors but as long as the broad trend in global growth is one of improvement, desynchronisation is not bad because it means central banks will stay supportive. Perhaps the bigger risk is that the longer rates stay low, the longer investors will expect this to remain the case which could set up bubble like conditions in various assets as investment yields (be they bond yields, dividend yields, rental yields, etc) get pushed ever lower as investors search for yield. However, for growth assets we look to be early in this process.
• In Australia, the June half profit reporting season is now wrapped up. While aggregate earnings growth in 2013-14 came in slightly lower than expected at the start of the results season thanks to misses by some large cap stocks (notably BHP), at around 12% it was still solid with two thirds of companies seeing gains in profits on a year ago. Rising dividends suggest amongst other things that the corporate sector is reasonably confidence in the outlook. See below for details

Major global economic events and implications

• US economic data was pretty favourable. While home prices were mixed in June and new home sales fell in July, pending home sales rose strongly, the Markit services conditions PMI remained strong, consumer confidence rose and durable goods orders surged. While a 23% rise in July durable goods orders owed to strong aircraft orders, the underlying trend is solid particularly for capital goods orders pointing to solid growth in business investment. Stronger investment also drove an upwards revision to June quarter GDP growth to 4.2% annualised from 4% initially reported.
• While momentum in money supply and bank lending improved a bit in July in the Eurozone, various confidence surveys softened in August confirming the loss of momentum seen recently in European growth adding pressure on the ECB to do more to stimulate growth. Quantitative easing focussed on the ECB using printed money to buy securitized bank loans looks likely to be launched soon.
• Japanese data for July disappointed with a smaller than expected gain in industrial production, continued softness in household spending, a rise in the unemployment rate and inflation falling slightly to 3.4% year on year, or 1.4% after the sales tax hike is allowed for. That said, the jobs to applicant ratio held at its highest since 1992 suggesting companies must be reasonably comfortable. Nevertheless, the soft July data will put more pressure on the Bank of Japan to consider further monetary easing.
• Korea was a bright spot though reporting a much stronger than expected gain in July industrial production.

Australian economic events and implications

• Australian economic data was a bit soft with falls in June quarter construction and equipment investment and a fall in new home sales in July. Private credit growth softened a bit after a stronger than expected rise in June with housing related credit looking like it has peaked on a monthly basis. Business investment plans for the current financial year also point to another decline on the back of falling mining investment. However, this has long been expected and there are some positive signs on the investment front. In particular, residential construction is continuing to rise and investment in what the ABS refers to as “other selected industries” looks like rising solidly in the year ahead. So dwelling construction and non-mining investment are helping to provide an offset to the slump in mining investment.
• The profit reporting season is now over and while the quality of results trailed off at the end as usual, overall it was pretty good. Particularly compared to the nervousness ahead of the results being released. 54% of companies have exceeded expectations (compared to a norm of 43%), which is the best result in nine years; 68% of companies have seen their profits rise from a year ago (compared to a norm of 66%); 65% of companies have increased their dividends from a year ago (up from around 60% in the last two years); and 59% 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 strong profit growth for resources (notably Rio, although BHP disappointed a bit), banks doing well (with a good result from CBA) but no better than expected, 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 growth for 2013-14 looks to have come in around 12%, which while down a bit from expectations a few weeks ago due to the BHP result causing a slight downgrade for resources, is still a solid outcome. Resources led with a 27% gain, followed by banks up 9% and the rest of the market up around 5%. Consensus expectations for the current financial year remain for 5% earnings growth, but this looks a bit low to me.

 What to watch over the next week?

• In the US, expect more solid readings from the ISM and Markit manufacturing conditions PMIs (Tuesday) and services conditions PMIs (Thursday), but the main focus is likely to be on jobs data (Friday) which is expected to show another strong gain in payrolls of 220,000 and the unemployment rate falling back to 6.1%. The Fed’s Beige Book of anecdotes on the economy (Wednesday) and trade data (Thursday) are also due for release.
• In Europe, the main focus will be on the ECB’s meeting on Thursday, where, following President Draghi’s recent comments regarding falling inflationary expectations, there is a 50/50 chance that it will unveil a quantitative easing program involving the purchase of private sector asset backed securities or if not allude that it’s on the way.
• The Bank of Japan also meets Thursday but it’s unlikely to make any changes to monetary policy.
• In China, the official manufacturing conditions PMI for August (Monday) is likely to have fallen back a bit in line with the HSBC flash PMI already released.
• In Australia, the RBA is expected to leave interest rates on hold yet again. Nothing much has changed since Governor Steven’s recent Parliamentary testimony where he expressed comfort with current interest rate settings. Rates have already been cut to record lows and the housing sector has led the response but with mining investment still slowing, non-mining capex still soft and the $A still strong its way too early to consider raising rates.
• It’s also going to be a bit of a data avalanche in Australia. The main focus is likely to be on the June quarter GDP data and here the news is unlikely to be good. Our expectation is for GDP growth of 0.5% quarter on quarter (or 3.1% year on year), but weak readings for net exports, consumer spending and investment suggest the risks are all skewed to the downside. In fact there is a high risk of a slight contraction in GDP. Inevitably this would invite talk of a recession, but as was the case with the previous three negative quarters seen in the last 23 years, a recession is unlikely. First, the soft June quarter result will be payback for the unexpectedly strong trade driven growth seen in the March quarter. So best to average the two quarters out. Second, a range of timely indicators relating to housing, retail sales, consumer confidence and the jobs market point to stronger conditions in the September quarter.
• In terms of other Australian data releases expect to see a further rise in house prices (Monday), a -0.7%  contribution to growth from June quarter net exports, weak public demand and a bounce back in building approvals (all Tuesday), another large trade deficit and modest growth in July retail sales (both Thursday). The AIG’s business conditions PMI’s will also be released.

Outlook for markets

• While shares have seen a strong recovery from the mini-slump seen in early August, 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 partly due to tax loss selling and the September-October period often being tough in Australia.

• 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. 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 getting the timing right is hard.

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

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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 29 August, 2014 appeared first on AdviserVoice.

• America’s payroll employment report for June provided a positive surprise. There was robust job gains of +288,000 and the US unemployment rate fell to 6.1% which is a near 6 year low. Given these encouraging job gains, the US central bank is likely to continue their strategy of gradually tapering asset purchases  (“Quantitative Easing”) until their completion in late 2014. However there are growing prospects that the US central bank will raise interest rates earlier than the market currently expects in mid 2015.
• Australia’s economic data provided mixed news. Nominal retail trade fell in May with sharp declines in department store and clothing sales. This could be due to Australian consumers being concerned over the Federal Budget’s higher taxes and spending cut measures and the jobs market. By contrast, residential building approvals surged in May. For the Reserve Bank, these mixed results for May’s retail sales and building approvals are likely to keep the RBA’s “very accommodative” 2.5% cash interest rate intact over coming months.
• The Reserve Bank (RBA) Governor Glenn Stevens issued warnings to housing investors and currency traders. The RBA Governor warned that if there was a “further big run up in prices” for housing with “overconfident expectations” and “increases in household leverage”, then this would be a “matter for concern”.  For the Australian Dollar, the RBA considers this is “uncomfortably high” as “most measures would say it is overvalued”. Hence “investors are underestimating the likelihood of a significant fall”.

What to watch over the week ahead?

• Australia labour force data for June will provide an important gauge of economic activity and confidence.  Job gains have been solid this year by averaging nearly +20,000 per month. However Australia’s unemployment rate has only marginally improved from 6.0 % to 5.8%. June’s result is likely to be on the softer side with only +10,000 extra jobs and unemployment edging up to 5.9% given the recent run of mild retail spending data and weaker consumer sentiment. However housing finance data for May should show solid rise in credit approvals given the strong rise in housing construction and housing prices witnessed so far this year.
• American corporations start their June quarter earnings season next week. Corporate earnings are expected to rise by a solid +6% for the past year according to Reuters. Given that US shares are at historic highs, there will be a heightened sensitivity to any earnings surprises or disappointments over the next few weeks.
• Financial markets will also concentrate on the Federal Reserve’s (FED) meeting minutes for June. These meeting minutes may provide some guidance on when the US central bank will end the asset purchases program (i.e. “Quantitative Easing”) this year and the possible timetable for raising interest rates in 2015. American economic data due next week is on the thin side. There is the NFIB small business survey for June which should see further gains in confidence.
• China’s Consumer Price Index and monetary aggregates for June are due next week. This data will provide a timely measure of inflation pressures and credit growth. Modest results for June inflation & monetary data will provide the Chinese central bank with flexibility to relax policy if needed to support economic growth.

Outlook for markets

• Global shares are vulnerable to a correction after the strong run in the first half of 2014. There are numerous possible catalysts for this correction in coming months. These include the US central bank rapidly winding back their policy stimulus and moving steadily towards raising interest rates, political risks in Iraq and Ukraine, or perhaps disappointment in Europe given a frail economic recovery and fragile financial system.
• However the strategic climate is still favourable for Global Shares. So the broad trend over the next few years is likely to remain up for Global Shares. Fundamentals remain favourable for Global Shares given reasonable current valuations, improving profits with rising economic activity and low Global interest rates. Hence any short term correction in Global Shares is seen as a buying opportunity.
• Government Bond yields should resume their gradual rising trend given improving Global growth and the US central bank moving towards raising interest rates in 2015. Hence the current low yields in Government bonds, cash and bank deposits are not attractive and should deliver very low returns over the coming year.

Major global economic releases and implications

• America’s ISM business surveys indicate that the US economy rebounded sharply in the second quarter after the harsh winter weather. The ISM manufacturing survey edged lower by -0.1 to 55.3 in June. Given that May’s ISM reading was a 5 month high, June’s reading is still very encouraging for US activity. The ISM Services survey marginally fell by -0.3 to 56.0 in June. Yet this is close to a 9 month high. These ISM surveys are consistent with strong +3% Real GDP growth in the June quarter.
• Europe’s unemployment is slowly coming down with the “very gradual” economic recovery. May’s unemployment rate for the Euro area is 11.6% which is an improvement on 12% unemployment rate recorded at the same time last year. However unemployment rates in some countries are still disturbingly high with Greece (26.8% unemployment) and Spain (25.1%) topping the distress list. For the European Central Bank (ECB), this labour market distress ensures that interest rates will remain low for a long time. The ECB kept their key policy interest rate at 0.15% at July’s meeting. The ECB President Dr Mario Draghi acknowledged that Europe’s economy was still in a “very gradual recovery”.
• China’s official PMI manufacturing survey shows an encouraging rise in business activity and confidence. June’s PMI rose by +0.2 to 51.0 which is its highest reading in the past six months. This PMI suggests that China’s economic growth has modestly accelerated towards a solid +7.5% Real GDP annual pace.
• Japan’s business surveys are giving mixed readings. The Bank of Japan’s Tankan survey for the June quarter shows that April’s consumption tax rise has dented business confidence. However this appears a temporary impact as the Tankan ‘outlook’ responses indicate a rebound in the September quarter. Solid gains for Japan’s PMI manufacturing survey and the Shoko Chukin small business survey for June also suggest that economic activity is set to revive in the second half of 2014.

Australian economic releases and implications

• Nominal retail sales fell sharply by -0.5% in May compared to the expected +0.1% gain. The sharpest falls were recorded in department stores (-2.6% mom), clothing and footwear (-2.3%) and household goods (-0.9%).  Previous months were also revised down be a cumulative -0.4%. So May’s result is a significant disappointment. Over the past year, nominal retail sales have increased by +4.6%.
• Residential housing approvals recovered strongly in May with a +9.9 monthly gain.  There was a robust rebound in the volatile apartments sector which rose by 27% in May while private housing rose by a more modest +0.5%.
• Hence these mixed results for May’s retail sales and building approvals are likely to keep the RBA’s “very accommodative” 2.5% cash interest rate intact. So the RBA’s mantra of “the most prudent course is likely to be a period of stability in interest rates” should continue to be chanted in Martin Place over coming months.

Major market moves

• Global shares generally had a positive week. American shares (S&P 500) rose +1.4% to a record high.   Both Germany’s DAX and Britain’s FTSE recorded strong gains of +2.3%. Japan’s TOPIX also benefitted by rising +2.6% for the week.  Australia’s ASX 200 rose by a solid +1.7% for the week.
• Government Bond Yields in America and Britain responded negatively to the better US economic data and the prospects of higher interest rates sooner in 2015.  American 10 year Government Bond yields rose by +10 basis points to yield 2.64% while British 10 year Gilt yields rose by +11 basis points to 2.75%. For Australian 10 year bond yields, there was milder upward pressure as yields rose by +5 basis points to 3.59%.

By Bob Cunneen, Senior 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) makes no representation or warranty 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 4 July, 2014 appeared first on AdviserVoice.

• The past week has seen shares and growth related trades rally strongly as the US budget crisis came to an end. As a result, all of the major policy and geopolitical threats facing investors a couple of months ago – Syria, Italy, the German election, the Fed’s taper decision, the replacement of Bernanke at the Fed, the US fiscal threats – have been consigned to the rear view mirror for now, clearing the way for further gains in share markets and other related trades into year end.
• While the budget and debt ceiling deal in the US is only a temporary solution – funding the Government out to January 15 pending agreement on a new budget and raising the debt ceiling out to February 7 – it would be wrong to expect a re-run of the latest budget fight early next year. The odds are that Republicans, who got most of the blame, will not want to push things too hard next year as it is a mid-term election year and they risk losing control of the US House of Representatives.
• Overall, the decision to end the US budget impasse is good news. Its shows that when push comes to shove US politicians will do the right thing (which is another reason not to be too fearful of the deadlines early next year), it means the impact of the shutdown on US growth once workers get back pay and government spending plays catch up will be minor and a threat to global economic growth has been averted. In short, the global economic recovery can continue and this is positive for growth assets. The increased likelihood that the Fed will delay tapering its monetary stimulus into early next year only adds to the positive investment back drop.
• The US debt ceiling debacle has seen the usual calls to “de-Americanise” the world. Sure the events in the US of the last few weeks were not great. But which other major countries don’t have their own policy imperfections (usually worse)? Europe was painfully slow in bringing its crisis under control, Japan took 20 years to get serious about fixing its problems, Russia has actually defaulted in the past and while China has no problems with democracy that’s only because it’s not a democracy.

Major global economic events and implications

• US economic data was a bit soft, possibly reflecting the impact of the partial Government shutdown. The New York and Philadelphia regional manufacturing conditions surveys both slipped in October, new mortgage applications fell, initial unemployment claims remained elevated and the NAHB home builders’ conditions index slipped. However, the damage looks to have been minor and its worth noting that the fall in the Philadelphia manufacturing index was trivial with several components actually rising, unemployment claims are likely to fall as Federal public servants return to work and the fall in the NAHB index just looks like normal volatility with the broad trend remaining up strongly. So overall expect the shutdown to knock about a bit off December quarter GDP growth but not enough to derail the economic recovery.
• The US September quarter profit reporting season is looking good. Out of 100 S&P 500 companies to have reported so far 70% have exceeded earnings expectations and 55% have exceeded sales expectations.
• In Europe, industrial production rose in August although but a bit less than had been hoped for, investment analyst sentiment rose and car sales rose the most in over two years
• Chinese data presented a pretty benign picture with September quarter GDP growth bang in line with expectations at 7.8% year on year, up from 7.5% in the June quarter, and healthy gains in September data for retail sales, industrial production, fixed asset investment and electricity production. While a slight loss of momentum in the September data suggests that GDP growth will slow a touch in the current quarter the strength in money supply and lending growth suggest growth will remain solid. Overall growth for 2013 looks like coming in around 7.7% which is slightly above the official 7.5% target. While inflation rose in September, this was mainly due to higher food prices with non-food inflation benign at just 1.6% year on year.
• India continues to disappoint with inflation rising in September making it hard to justify any central bank monetary easing despite recent weak industrial production data.

Australian economic events and implications

• In Australia, the RBA reinstated its easing bias in the minutes from its last meeting after appearing essentially neutral on the rate outlook in its last post meeting statement. This has been the pattern over the last 3 months now leading one to wonder whether the RBA has become schizophrenic. What is clear though is that the RBA feels no urgency to act on its easing bias. In fact our view remains that with various domestic indicators showing signs of responding to past rate cuts the RBA will remain on hold ahead of the next move being a rate hike, but not till around next September/October.
• While it’s not our base case one factor that could bring on another rate cut is a continued strong rise in the $A, say back above parity. The RBA would prefer a lower currency with Governor Stevens commenting Friday that “a lower currency would be helpful”. This didn’t stop it rising to $US 0.9676 on Friday night though.
• On the data front housing finance fell in August but the trend remains up and finance for construction rose strongly. This all suggests the housing recovery remains on track.

Major market moves

• Share markets surged higher as the US budget crisis came to an end. US shares rose 2.4%, Eurozone shares gains 2%, Japanese shares rose 2.6% and Australian shares gained 1.7%. The rally in shares over the last week as the US budget crisis came to an end has been very impressive: US shares have broken out to new record highs, global and Australian shares have surged to new cyclical highs and the gains have come on good volumes and breadth. In other words the rally has good support from investors searching for higher returns than is available from cash. This all points to further gains ahead.
• While the oil price fell, most commodity prices gained on the back of the ending of the US budget crisis and the fall in the $US, partly on the back of an increasing likelihood that Fed tapering will be further delayed. This saw the $A rise strongly, pushing towards $US0.97.
• Bond yields also fell, but particularly in the US as the small risk of default was priced out. Credit spreads narrowed further.

What to watch over the next week?

• In the US the highlight is likely to be the delayed September employment report now due to be released on Tuesday which is expected to show a 185,000 gain in payrolls and unemployment holding at 7.3%. In terms of other data, expect a slight fall back after strong gains in August for existing home sales (Monday) and new home sales (Thursday), a continuing gain in house prices (Wednesday), a fall in the Markit manufacturing conditions PMI (Thursday) reflecting the impact of the Government shutdown and debt ceiling uncertainty and a soft final reading for October consumer sentiment (Friday). Durable goods data due to be released Friday may be delayed because of disruptions to data collection due to the shutdown.
• The US earnings reporting season for the September quarter will continue. Consensus expectations for 2% growth year on year are likely to be surpassed after the usual upside surprise and come in around 4 to 5%.
• In the Eurozone, preliminary business conditions PMIs (Thursday) will be watched for a continuation of the rising trend evident over the last year or so.
• Japanese inflation data (Friday) is likely to show further signs of a return to inflation.
• The October HSBC flash manufacturing PMI for China will be released Thursday and is likely to show that growth has stabilised or maybe even slowed a notch rather than continued to accelerate.
• In Australia, September quarter inflation data is likely to show a sharp rise in the quarter of 0.8% reflecting a 6% rise in petrol prices due largely to the mid-year fall in the $A, but because the impact of the start of carbon pricing a year ago will drop out the annual rate of inflation will fall to around 1.8%. Despite these gyrations the underlying measures are expected to show a quarterly increase of 0.6% as pricing power remains weak and annual inflation of just 2.2% year on year indicating that inflation remains benign and is certainly not a constraint to further monetary easing if that proves necessary.

Outlook for markets

• The ending of the US budget crisis has cleared the way for shares to have a solid rally into year end with further gains next year. Share market valuations remain reasonable, monetary conditions are set to remain easy and profits are likely to improve next year as global and Australian growth picks up. Australian shares look on track to hit 5500 or even higher by year end, with a little help from a Santa rally.
• Government bond yields are likely to resume a gradual upwards trend as the global economy continues to pick up momentum and as Fed tapering eventually comes back into focus either later this year or early next. Low yields and an unwinding of years of massive inflows point to poor sovereign bond returns ahead.
• Signs that Australian interest rates are bottoming, a delay in Fed tapering, stable growth in China and improving global growth at a time when short $A positions remain extreme suggest that in the months ahead the $A is likely to see more upside, probably up to around $US0.98, before the medium term 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

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