Olive Branches | BetaShares

Olive Branches

BY David Bassanese | 16 September 2019

Global Markets

Global equities continued to recover last week, buoyed by ongoing signs of a thawing in the frosty trade relations between the United States and China. Each side offered the other olive branches, with China agreeing to exempt certain US imports from tariffs and the US announcing a two week delay before planned tariff increases on October 1 go into effect.

As I’ve suggested in a separate note, me thinks Trump is warming to a compromise “interim” deal given growing risks to US economy if tensions drag into the 2020 election year.  We’ll  see!

Also bolstering sentiment last week was another solid US retail sales report, suggesting the US consumer remained strong in the September quarter.

Trade hopes have seen a reversal in many recent market trends of late – with US equities almost back at all time highs, gold down, the $A up and a major rebound in long term bond yields.  Indeed, US 10-year bond yields ended the week at 1.9%, up a whopping 0.45% from their recent low of 1.45% on September 4.   In turn, this has bolstered some “value” segments of the market like financials, as their profit margins improve with higher rates.

In other key global news, the European Central Bank announced more stimulus, which failed to provoke much sustained market excitement given doubts it would do much to boost European growth or inflation – and given the fact many voting ECB countries seemed to be against the idea.

My view is that ECB policy tools are spent, and to the extent anything can or should be done to boost Euro-zone growth, it requires far reaching structural reforms – which seem very unlikely.  As it is, overall Euro zone grow is still not that bad relative to potential, and low inflation is largely weak for structural not cyclical reasons (as I believe is the case around the developed world). Draghi’s term as ECB President ends with a whimper rather than a bang.

As regards Brexit, chaos prevails, with UK PM Johnson apparently ready to still threaten the EU with a “do deal” exit unless they compromise – despite new Parliamentary legislation suggesting that would be illegal. Even if Johnson could legally threaten a “no deal” exit, moreover, I suspect the EU remains in no mood to compromise.

In late breaking news on Sunday, meanwhile, oil prices look set to start the week sharply higher after a major rebel drone attack caused an immediate halving in Saudi Arabia’s usual daily oil production of 10 million barrels per day – equal to around 5% of global supply.  This follows a soft week for oil prices on growing concerns that 2020 might well see an oil glut due to slowing global growth and rising production.  How sustained the oil price spike proves to be will depend on the speed with which Saudi Arabia can repair the damage and the extent to which other suppliers either boost production or tap their reserves.  At this stage I suspect the impact on other markets will be quite limited.

Apart from watching oil prices and news with regard to the trade talks, the key global development this week will be Thursday’s US Federal Reserve meeting. The Fed is likely to deliver on a widely expected 0.25% rate cut, though the market will be sweating over whether the Fed continues to hint at further rate cuts to come. If the Fed signals a pause, expect bedlam in markets and twitter rage from Trump.  Instead, I suspect the Fed will keep the door open, suggesting it will continue to “act as appropriate’, especially given lingering uncertainty over whether the US and China will ultimately strike a deal.

That said, if a trade deal does come through and the US economy remains solid, the day is coming when the Fed will need to risk the wrath of markets by signaling a pause, lest it lose its own remaining shards of credibility.

Australian Market

There was mixed news in Australia last week, with a rebound in home lending further confirming – along with house prices and auction clearance rates – that interest is returning to the market now that lending conditions have eased and the RBA has cut rates.  That said, the NAB and Westpac measures of business and consumer sentiment respectively were fairly downbeat, suggesting tax cuts and lower rates were not as yet having much success in lifting “animal spirits” in areas other than home buying.

This possibly reflects recent negative headlines with regard to local economic growth and global trade tensions – and the fact that, according to Westpac, around half of the 30% of households likely to get a “meaningful” tax rebate had still yet to receive it.  Either way, the early evidence suggests recent stimulus is having little impact apart from potentially reflating the Sydney house price bubble.

In what will be “old news” the ABS official measure of house prices on Tuesday will likely show a further moderate fall took place in the June quarter.  RBA minutes the same day will show it remains in wait and see mode.  Of more interest will be Thursday’s employment report, which is expected to show a more modest 10k increase in employment during August (after July’s bumper 40k increase) and a further edging up in the unemployment rate to 5.3%.

Although a lift in unemployment will add to pressure on the RBA to cut rates, I still think – particularly given tentative signs of hope with regard to the trade wars – that it’s more likely to wait until November before cutting rates again.

Have a Great Week!

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