Monthly economic e-news – February 2019

19 February 2019

By Craig Turnbull
Chief Investment Officer


Santa delivers a market bounce but how long will it last?

In the final weeks of 2018, global investors lost their appetite for risk and the expected holiday rally turned into a rout with share markets around the world falling sharply in the lead up to Christmas.

But Santa finally arrived and US shares led a bounce in global markets, rising 15% between Christmas and the end of January. However, opinions are divided on what this means for the rest of 2019.

 

Source: Yahoo Finance 

What was behind the Christmas bounce?

Over the last twelve months, investors became increasingly anxious about a range of economic issues, namely, the ongoing trade war between the US and China, falling oil prices and the fear of rising interest rates in the US.

But over the holidays, there was some positive news on these issues.

Trade negotiations between the US and China finally seem to be making some progress with China agreeing to expand their imports of US agricultural and energy products as well as manufactured goods and services.

The Chinese state news agency also referred to ‘constructive discussions’ on the sticking points of technology transfer and intellectual property protection.

World oil prices fell in late 2018 mainly due rising US oil supplies and fears of a slowdown in global growth. However, recent OPEC-led production cuts and US sanctions against Venezuela have boosted oil prices and the value of energy shares.

Fears of US rate rises was one of the main drivers of the pre-Christmas market plunge but the US Federal Reserve changed tack in January by keeping the US federal funds rate on hold and softening its rhetoric on future rate rises.

The Federal Reserve’s commitment to be patient as it determines what future adjustments may be appropriate was welcome news to investors.

What’s the global outlook for 2019?

Despite the bounce on share markets, the unresolved trade tensions and predictions of slowing global growth mean that markets are likely to remain volatile at least in the short term.

While US President Trump is optimistic that the US and China can reach the “the biggest deal ever made” there are still doubts about what concessions China will be willing to offer the US on the key issues of technology transfer and intellectual property.

There is also evidence that the trade war is starting to bite with China’s annual GDP growth rate slowing to 6.5% in the September 2018 quarter, adding to the persistent fears about global growth.

In response, the People’s Bank of China has injected more than a trillion yuan into the local economy. While the short-term stimulus is welcome, it has raised concerns about risks of rapidly rising debt levels in the world’s second largest economy.

So in this context the US Federal Reserve’s decision to ease off on the rate hikes may provide some immediate relief. However, there is still a lot of uncertainty and this is likely to weigh on the minds of global investors over the next six to twelve months.

So what does this mean for the Australian economy?

Closer to home, the economy is still growing at around 3% per annum but a range of domestic issues including stagnant wage growth, declining residential property values and political uncertainty, have been eroding business and consumer confidence.

In a recent speech, the Governor of the Reserve Bank, Philip Lowe, signalled a subtle change in the RBA’s outlook for the Australian economy. He noted the uncertainty around “the strength of consumption and the housing market” and said that the chance of a rate cut is now “more evenly balanced”.

So market analysts will be looking closely at results of some of our largest companies over the current corporate reporting season to try and get a better idea of where the economy may be heading in 2019.

 

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Markets at a glance

for the month ending 31 January 2019

Australian shares 1 up by 3.87%
Australian Government Bonds yield2 down to 2.240%
 Australian dollar up to US$0.7268 
noArrow Cash ratesteady at 1.50%
upArrow International shares4 up by 7.70%

 

1 ASX 200 Accumulation Index
2 Yield on 10 year Australian Government Bonds
3 RBA cash rate
4 MSCI – World ex Australia (USD)

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