Download as PDF

28 August 2015
Data/Event
Movement
LATEST
PREVIOUS
US – FHFA house price index, June
0.2%
0.5%
Australia – Construction work done, Q2 2015
1.6%
-0.8%
Japan – Unemployment rate, July
3.3%
3.4%
Financial markets
Friday
28 August
2015
Friday
21 August
2015
Weekly
change
28 August
2014
12-month
change
S&P/ASX 200 Index
5,264
5,215
+0.9%
5,624
-6.4%
S&P/ASX 200 Property Trusts
1,246
1,236
+0.8%
1,139
+9.4%
US S&P 500
1,989
1,971
+0.9%
1,997
-0.4%
342
338
+1.2%
319
+7.1%
UK FTSE 100
6,248
6,188
+1.0%
6,806
-8.2%
Japan TOPIX
1,550
1,573
-1.5%
1,281
+21.0%
CHINA - CSI 300
3,342
3,590
-6.9%
2,311
+44.6%
MSCI (ex-Aust/in LC)
1,275
1,266
+0.7%
1,260
+1.1%
Australian 90-day bank bill yield
2.13%
2.13%
0 bps
2.63%
-50 bps
Australian 10-year bond yield
2.73%
2.59%
14 bps
3.32%
-59 bps
US 10-year bond yield
2.18%
2.04%
14 bps
2.34%
-16 bps
Oil – West Texas Crude
45.22
40.24
+12.4%
94.55
-52.2%
A$ in US cents
0.7173
0.7316
-2.0%
0.94
-23.3%
A$ trade-weighted index (TWI)
61.00
62.30
-2.1%
71.90
-15.2%
Indicator
Dow Jones Eurostoxx
Major upcoming global economic releases and events
Date
Data/Event
Previous
Forecast
1 September
US – ISM Manufacturing PMI (Aug)
52.7
52.7
31 August
EUR
– Consumer Price
ISM Manufacturing
PMI Index
(Aug) - Core (YoY) (Aug)
0.2%
0.0%
31 August
Australia – RBA Interest rate decision
2.00%
2.00%
Investment markets and key developments over the past week
Share markets have gone from goodbye to good buy over the last week. The turmoil in global share markets continued into the
past week, but signs of stabilisation and improvement gradually started to appear resulting in several share markets actually rising over
the last week. Believe it or not, this started in Australian shares on Tuesday as buyers saw value around the 5000 mark on the ASX
200 and then continued as China eased monetary policy, Fed officials indicated that a September interest rate hike was looking less
likely if global growth worries persist and global investors refocussed on good US and Eurozone economic data. Despite a strong
turnaround Chinese shares still fell 6.9% over the week and Japanese shares lost 1.5%, but US and Australian shares gained 0.9%
and Eurozone shares rose 1.2%. Commodities traced out a similar path, falling initially before rebounding sharply with metals and oil
up over the week. The turn up in share markets also saw bond yields rise and the $A recover partially from a low of $US0.7050 early in
the week.
From this year’s highs to their lows in the past week major share markets have now had the following falls: Chinese shares -43%,
Asian shares (ex Japan) -23%, emerging markets -22%, Eurozone shares -18%, Australian shares -16%, Japanese shares -15% and
US shares -13%. While it’s too early to say we have seen the lows, there are several positive signs in that: shares have become quite
cheap again, investor sentiment on some measures has fallen to bearish extremes that are often associated with market bottoms and
the monetary easing in China along with signs that the Fed is prepared to delay (yet again) its planned rate hike have helped provide a
circuit breaker to the falls.
China moved into gear big time over the last week with a cut in both interest rates and required bank reserve ratios, liquidity
injections, capital injections into some banks and an expansion of the program that allows local governments to swap their
higher cost debt for cheaper debt. The interest rate and reserve ratio cuts were long overdue. China’s official interest rate of 4.85%
was leading to borrowing rates for small and medium sized companies that were way too high at a time when producer prices are
falling. China is the only major economy with lots of fire power to provide stimulus and also the only one that needs to. Further easing
in China – including fiscal stimulus is needed and likely because the last thing China wants is the sort of social unrest that will flow from
a hard landing in its economy.
Comments by Fed officials clearly indicate that they are aware of the risks to US growth and inflation from uncertainty
regarding global growth and weak commodity prices. In fact the third most powerful official at the Fed, William Dudley indicated
that an interest rate hike in September now “seems less compelling.” While Fed Vice Chairman Stanley Fischer was less committal he
also indicated the Fed is watching how developments following China’s devaluation unfold. This is a good sign and consistent with the
view that the Fed is not going to do anything that mucks up the global economic recovery and threatens US growth and inflation.
The Australian June half profit reporting season is now complete, and although results have been a little disappointing they
have not been disastrous. 43% of companies have beaten expectations and 59% have seen their profits rise from a year ago which
is okay, but it’s well down on what we have been seeing in the last few reporting seasons. Reflecting the slightly disappointing results
and soft guidance only 48% of companies saw their share price outperform the share market the day their results were released which
is down on the experience of the last few years.
While Australian listed company profits fell nearly 2% over the last financial year this was driven by a 28% slump in resources
profits with the rest of the market seeing profit growth of around 7% driven in particular by general industrials, building materials,
retail and health care stocks although the latter disappointed relative to expectations. Key themes have been constrained revenue
growth, strength in companies connected to home building and NSW and solid growth in dividends with 57% of companies raising
dividends. Weak guidance saw profit growth expectations for 2015-16 revised down to around 2%, but again with the strength coming
from non-resources companies which should continue to benefit from low interest rates and the lower $A.
Major global economic events and implications
US economic data was good. Home price data was on the soft side but it’s still trending up and more importantly consumer
confidence rose strongly in August which is positive for consumer spending and orders for capital goods orders rose solidly which is
positive for business investment, June quarter GDP growth was revised up to 3.7% annualised and jobless claims fell. Meanwhile,
inflation as measured by the core personal consumption deflator fell to 1.2% year on year in July so inflation remains well below target.
With inventories likely to act as a drag on US growth in the current half year, the US economy is still far from strong/inflation threatening
growth but it does look solid. So while the Fed may delay hiking rates, it’s still likely sometime in the next six months.
European economic news was also good with overall economic confidence unexpectedly rising in August, money supply growth up
and bank lending growth accelerating further all pointing to stronger growth in Europe.
Japanese data for July showed a strong labour market with the jobs to applicants ratio at its highest since 1992, but soft household
spending and core inflation too low at 0.6% yoy.
Australian economic events and implications
On the economic front in Australia, the main focus was on business investment and here the news remained weak. Business
investment fell further in the June quarter and investment intentions point to around a 25% fall in business investment in the current
financial year with mining investment falling 38% and non-mining investment also falling by around 8%. This is little different from the
outlook seen in the March quarter capex survey, but the failure of non-mining investment to improve remains a concern. Pressure is
likely to remain on the RBA to cut rates again.
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.
At last petrol prices have really started to fall back into line with where the global oil price and $A suggest they should be with
prices falling to around $1.15/litre in the last week. The move from around $1.40/litre will save the typical family nearly $9 a week or
$455 a year if sustained.
What to watch over the next week?
In the US the focus will be on the August ISM manufacturing conditions index (Tuesday), which is expected to remain around
53 and July employment data (Friday), which are expected to show jobs growth of 220,000 and unemployment remaining
unchanged at 5.3%. This will also be the last jobs report before the Fed's next meeting and so the focus is most likely to be on wages
growth which is expected to remain soft at around 2.1% year on year, providing no signal of rising inflation pressures from this source.
In Europe, August inflation data (Monday) could go negative again with core inflation also low. The ECB (Thursday) is unlikely
to make any changes to monetary policy but is likely to acknowledge the downside risks to global growth from China and the emerging
world and indicate it stands ready to ease more if necessary.
China will release its official August manufacturing conditions PMI on Tuesday and this is expected to fall slightly from the 50 reading
seen in July.
In Australia, the RBA (Tuesday) is expected to leave interest rates on hold consistent with its assessment that recent
Australian economic data has been a bit better and unemployment a bit lower than previously expected. However, of most
interest will be any comments regarding recent financial market turbulence in relation to China/emerging market driven worries and in
particular whether this suggests a strengthened easing bias. My view remains that the probabilities are skewed towards the RBA
having to cut rates again at some point. The continuing slide in the $A is only a partial offset to this.
On the data front expect to see new home sales remain solid and credit growth remain moderate (both Monday), home price growth to
slow a bit in August, net exports to detract around 0.5 percentage points from June quarter GDP growth but building approvals
bouncing 4% after a fall in June (all Tuesday), June quarter GDP growth slowing to 0.3% quarter on quarter or 2% year on year
(Wednesday), a slowing in July retail sales growth to just 0.2% month on month and another large trade deficit (all Thursday). Of these,
the June quarter GDP growth figures will be of most interest with consumer spending holding up but investment and trade
detracting from growth and some risk of a negative outcome. July credit data will also be watched for signs investment lending is
slowing, although it may be too early for recent APRA driven measures to have impacted.
Outlook for markets
Share markets could still see more volatility in the short term as we are still in a seasonally weak period of the year for shares,
uncertainties regarding China and the emerging world are likely to linger and uncertainty still remains around the Fed.
But beyond near term uncertainties we may have already seen or come close to the low and we see the cyclical bull market in
shares as likely to resume: share market valuations against bonds are now even better; monetary conditions are set to remain easy
with the latest global growth scare likely to drive further global monetary easing and see the Fed delay raising rates yet again; this in
turn should help see the global economic recovery continue; and finally investor sentiment has deteriorated rapidly into the sort of
pessimism that provides great buying opportunities. As such, despite the recent set-back, share markets are likely to remain in a
broad rising trend. While it seems a long way away I remain reluctant to ditch my year-end target of 6000 for the ASX 200. The key
though is that share markets are likely to be higher by year end than they are now.
Low bond yields point to soft medium term returns from bonds, although the recent share market downswing which saw bonds
rally provides a reminder that government bonds remain a great portfolio diversifier.
The $A is due for a decent bounce after having hit $US0.7050 early in the last week, but the broad trend is likely to remain
down as the Fed is still likely to raise rates sometime in the next six months despite ongoing delays whereas there is a good chance
the RBA will cut rates again and the trend in commodity prices remains down. Our view remains that it is heading into the $US0.60s.
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.