Global Review & Outlook
- It was another modest week for global equities overall as a sharp drop in oil prices took the wind out of the energy sector. Despite OPEC’s extended production cut agreement, rising supply – not only in the US but Nigeria and Libya also – continue to keep the market awash in oil. On a brighter note, the technology-led NASDAQ-100 rebounded after recent weakness, and the health care sector was buoyed by hopes of a new health-care “reform” package winding its way through the US Congress.
- Also supporting risk sentiment generally is the fact that bond yields and the $US dollar remain dormant as recent downside surprises on US inflation (largely due to lower energy costs) has raised doubts on whether the Fed will raises rates any further this year. As it stands, the markets now judges a Fed rate hike by December as only a 50-50 chance.
- In other global news, share’s traded in China’s mainland market (so-called “A” shares) were finally admitted into the MSCI emerging market equity benchmark index – in recognition of eased restrictions on foreign purchases. While this should increase global demand for Chinese stocks over time (at least by index-hugging emerging market fund managers), the initial weighting is only 0.73% of the benchmark, which will be phased in over two stages in May and August next year.
- There is little again in the way of major global data or events this week, through the US consumer price deflator will be of some interest Friday in light of recent downside inflation surprises.
Australian Review & Outlook
- The previous week’s encouraging rebound in the S&P/ASX 200 was unwound last week, as threats from Amazon, weaker oil prices and even the South Australia Government’s surprise decision to levy its own tax on banks took their toll. Despite the equity market’s own struggles, however, Reserve Bank Governor Lowe remained upbeat on the economic outlook in commentary last week, though he did lament the lack of wage growth.
- Economic data was also upbeat, with car sales rising 2.9% in May and the ABS official measure of house prices posting a 2.2% gain in the March quarter. More timely housing data – such as weekly auction clearance rates in Sydney – suggest price pressures are finally easing in this long hot market. No major data or events this week!
- 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!