Global Markets Review & Outlook
Despite the failure (again) of the US Senate to agree on healthcare reforms, US stocks rose modestly last week on the back of continued better-than-expected earnings results. According to FactSet, around 20% of S&P 500 companies have now reported Q2 earnings results, with 73% beating forecasts – which is above the 5-year average of 68%. While the energy sector is the biggest contributor to growth in earnings over the past year – thanks to the earlier rebound in oil prices – the technology and financial sectors are providing most of the upside surprises in recent weeks.
Markets remain forgiving of Washington’s policy failures so far – figuring tax cuts will be easier to agree on. I’m not so sure: Republicans also shared a hatred of Obamacare but this was not enough to achieve a workable compromise on reform between the extreme-right and more moderate members of their party. Similar disagreement seems likely if proposed tax reforms appear to greatly favour the rich!
In other key global news last week, the Euro rose and the $US dived following further hints from the ECB’s Mario Draghi that an announcement regarding reduced bond purchases will most likely to made within the next few months. Low UK inflation also hurt the Pound as it reduced the chances of the Bank of England tightening anytime soon, while the Bank of Japan remained firmly on hold and now doesn’t expected inflation to reach its 2% target before 2019!
China also reported a slightly better-than-expected annual GDP growth of 6.9% (market 6.8%) for the June quarter, with reassuringly robust partial indicators such as retail sales and industrial production. Given its 2017 growth forecast is only 6.5%, China now has some leeway to tolerate a softening in growth over the second half of the year – which officials might view as helpful to keep persistent house price pressures in check. That said, ahead of its key 5-yearly National Conference later this year, officials will remain keen to portray an economy performing well and still under their careful control.
In what will be the busiest week of the reporting season, US earnings reports will remain a key global focus this week – with 170 – or around one third – of S&P 500 companies facing the music. Based on reports so far, it seems likely that earnings will continue to pleasantly surprise, helping Wall Street hold or surpass recently record price levels. Wednesday’s Federal Reserve Policy meeting is unlikely to rock the boat too much, with no change in policy expected – though the Fed may well hint that the timing of planned balance sheet reductions will be announced at the next meeting in September. While markets seem prepared for such a hint, it might nonetheless provide some lift to the $US and bond yields.
Rounding out the week, Q2 US GDP results on Friday are expected to show the economy is still only moderately growing – with a modest rebound in annualised growth to 2.5%, after a very soft (seasonally distorted) 1.4% result in the March quarter.
Australian Market Review & Outlook
The key local developments last week were another solid labour market report (employment up 14,000 in June with full-time employment up a staggering 62,000) together with market’s overly hawkish interpretation of the RBA’s June policy meeting minutes – both of which conspired to push up the $A to almost US 80c. Thankfully, sanity prevailed by week’s end with Deputy Governor Guy Debelle reassuring markets that the Bank isn’t going to raise rates anytime soon and it is rightly miffed about the $A’s recent strength.
The key highlight this week will be the Q2 CPI on Wednesday, which is likely to show underlying annual inflation remains stubbornly below 2% (around 1.8%). RBA Governor Phil Lowe also speaks that day and is likely to re-confirm the Bank’s neutral policy bias while acknowledging that wages growth remains remarkably – and frustratingly – subdued.
Have a great week!