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The Week in Review
The two key highlights in markets last week were the upside breakout of the S&P/AS 200 Index (through previous resistance at 6,000 points), and a moderate “risk-off” move globally due to worries over America’s tax cut plans.
First the Aussie stock miracle. After an exceptional period in which the S&P/ASX 200 traded in a very narrow range around 5,700 (between May and October) the index has leapt 6.7% since early October (compared to 1.2% for the US S&P 500). Why the move? We can’t really credit the economy – overall economic data has remained fairly mixed, with business confidence and employment solid but retail spending soft and growing signs a cooling in Sydney house prices.
That said, fears of imminent RBA policy tightening have cooled – with local 10-year bond yields down from 2.8% to 2.6%, which in turned appears to have particularly help yield-sensitive sectors such as utilities and listed property. Indeed, in its latest Statement on Monetary Policy released last week, the RBA downgraded its inflation outlook, suggesting a move back above 2% will be a struggle for sometime – suggesting it’s in no hurry to lift rates.
The recent lift in oil prices has also boosted the energy sector, which has been the strongest sector performer with a 10% price gain over the past month. Similarly, the fall back in the $A from around US80c since late September has improved the offshore earnings outlook for many companies. With global market having lifted strongly in recent months, some investors perhaps also felt out market had been left too far behind. Given the positive global backdrop, chances are our market can now sustain itself above 6,000 though I still suspect we’re likely to under perform our global peers unless the $A drops a lot further sometime soon.
Meanwhile, as I suspected last week, lacking a lot of data to chew on global markets saw fit to fret about US tax cut plans. Of most concern, the Senate version of the tax plan involved a one-year delay in corporate tax cuts. That said, as is the way in Washington, this appears largely haggling between each of the two houses of Congress (who each are working on their own tax cut plans) that will ultimately need to be reconciled – and a unified bill passed by each. It still seems likely some version of a tax cut plan will be agreed upon – if only so there’s something to show voters ahead of next year’s Congressional elections. Either way, while it would be a nice further tailwind, I don’t think a US tax cut is critical for the global equity bull market to continue – given this mainly reflects ongoing good global growth and low inflation. Indeed, also noteworthy last week were upbeat service sector surveys in both the Eurozone and Japan.
The Week Ahead
There’s more economic news to digest this week, including US consumer price inflation – which is likely to confirm inflation remains stubbornly benign at just under the Fed’s 2% target. Also lookout for likely upbeat Q3 GDP reports for both the Euro-zone and Japan – confirming the “synchronised” nature of the current global upswing.
Locally, we get an update on the state of business and consumer sentiment – with the NAB and Westpac surveys respectively. Another likely solid labour market report is also due Thursday.
All that said, given last week’s action, markets seem likely to also retain an intense focus on the machinations of the US tax debate.
Have a Great Week!