A Cleansing Pause | BetaShares

A Cleansing Pause

BY David Bassanese | 19 June 2017

Bassanese Bites Market performance

Global Review & Outlook

  • Global equities continued to consolidate last week in the absence of bullish new news. Indeed, the US Fed’s widely expected decision to lift rates barely made a ripple, with both bond yields, the $US and equities taking the decision in their stride. With the Fed now out of the picture for at least the next three months or so, obvious catalysts to push bonds yields and the $US higher anytime soon appear lacking – unless President Trump manages to overcome his political challenges to re-focus on fiscal stimulus plans. With OPEC’s production cut agreement failing to stem global oversupply, oil prices retreated further last week – which should also help contain inflation.
  • In other major news, Amazon’s announcement it bought Whole Foods – a major US supermarket chain – sent a shudder through the US listed retail sector on Friday, as the threat of competition from Bezos intensified. China’s “data dump” suggested the world’s 2nd largest economy continues to chug along at a stable pace, which perversely is not too bullish for resources as it suggests China will remain focused over the shorter-run at least in reigning in rampant credit growth.
  • There is little in the way of major data or events globally this week, suggesting the Trump saga may re-claim the spotlight. In a potentially bullish development for European equities, however, Macron’s new political party romped home in Sunday’s French elections, opening the way for possible market-friendly reforms of the kind which have helped to greatly bolster Germany in recent years. We can only wait to see if Macron follows though, and can overcome cosy vested-interests to inject a little more vigour into the French economy.

Bassanese Bites - Global Market performer
Australian Review & Outlook

  • After taking a drubbing in recent weeks, the S&P/ASX 200 rebounded last week – outperforming global markets – with banks once again back in favour. There appeared few obvious catalysts for the move, other than a general view that some value had re-emerged in financials – possibly reflecting an uptick in talk the RBA could eventually cut interest rates in light of the previous week’s weak 0.3% Q1 GDP outcome.
  • That said, any thought of a RBA rate cut was smashed by the May labour market report – which revealed a solid 42k gain in employment and a drop in the unemployment rate to 5.5%. Together with another solid NAB Business survey – with the index of business conditions holding at above-average levels in May – it’s hard to escape the conclusion the economy is chugging along reasonably well at present (despite the erratic GDP numbers!).
  • There’s only 2nd tier data and events locally this week. Minutes from the RBA’s May meeting are released on Tuesday, which are likely to show the RBA still fairly content with the economic outlook and current policy settings. The embarrassingly outdated Australian Bureau of Statistics official measure of Q1 capital city house prices is also released on Tuesday. More timely information suggests auction clearance rates in Sydney have eased in recent weeks, suggesting the barrage of measures to contain investor lending in recent months is perhaps finally starting to cool the market.

The Wrap

  • Despite all the usual risk factors than can be cited, the bottom-line reality is that the global economy is enjoying a period of good growth (which is also broadening to Europe/Japan) and continued persistent low inflation. Importantly, the Fed’s policy tightening so far has been calmly accepted. Against this backdrop, it’s hard to be super negative on equity markets – suggesting the current period of consolidation will prove only temporary – even though outright price-earnings valuations are at above-average levels and earnings growth is still a little patchy. In turn, such an environment favours the tech heavy Nasdaq especially, and some catch-up performance in Europe and Japan. Meanwhile, sectors that stand to most benefit from rising bond yields – such as global banks – are biding their time.
  • Closer to home, recent upbeat economic indicators suggest the real economy is travelling reasonably well, even though this is not as yet translating into decent listed company earnings performance due to intense competition and weak nominal incomes growth. In such an earnings challenged environment, yield, rather than growth, investment themes are likely to remain favoured locally – which will tend to favour financials (over say, bond proxies like listed property) if longer-term bond yields do eventually start to rise.

Have a great week!

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