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Market Wrap 07/09/2018

By: Gilbert Battistella


Equities:

Against a backdrop of simmering political tensions, Australian equities have faltered to a loss for a seventh consecutive day. This week alone, the S&P / ASX 200 index has fallen 2.8%, to 6143.8 points. This represents the worst five-day period for the S&P / ASX 200 in over six months.

The downtrend is primarily anticipatory of further escalations in the emerging trade war between the economic powerhouses of China and the United States. Whilst Donald Trump’s affinity of protectionist policies has long been known to the market, the extent to which he now appears to be prepared to pursue these policies was initially underestimated by the market consensus. Trump’s threat to impose tariffs of up to 25% on over $US200 billion worth of Chinese exports has expectedly been met by the threat of retaliatory counter measures from the Chinese government. The turmoil of this week is only a small taste of what could be expected to eventuate in succeeding weeks if a full-blown trade war does transpire.

Commodities:

Oil prices have bucked their recent uptrend, falling 3.5% this week to presently sit at $76.35 per barrel. This has been in spite of The Organisation of the Petroleum Exporting Countries (OPEC), declaring their expectation of oil demand breaching 100 million bdp in the imminent future. The positive demand outlook has been overshadowed by the US’ unforeseen stockpiling of crude oil inventories.

Precious metals are traditionally considered a safe haven in times of fear and uncertainty. Therefore, it is of no surprise to have seen a rotation in the allocation of capital favoring gold and silver following the escalation of trade conflict between China and the United States. Gold erased its prior two weeks of losses, consolidating with a 2% increase.

Forex:

The AUD has maintained its recent correlation with emerging market currencies, falling to a two and a half year low, currently buying 0.7145USD. Despite the healthy levels of Government debt, the Australian currency is internationally considered to be of moderate risk due to concerns regarding valuations in the domestic housing market, consumer debt levels, and the small relative size of the Australian economy. Accordingly, there has been capital flight to highly secure currencies such as the Swiss Franc and Japanese Yen.

Meanwhile, in the US, the Federal Reserve are poised to hike rates this month, which will be the third rate hike of 2018 in order to maintain stable economic growth and inflation around the Fed’s target of 2%. The current federal funds rate is below monetary neutrality, meaning that the fed’s monetary policy setting is applying a net stimulus to US economic activity. Given the current outlook, Chicago Federal Reserve Bank President, Charles Evans, stated this week that he anticipates monetary policy moving “toward a neutral setting and then likely a bit beyond neutral”. This underlines the administerial optimism towards immediate economic prospects in the US.

Bonds:

This week saw increased allocations towards fixed income in response to the prospects of significant economic uncertainty. This resulted in modest gains being recorded, with the yield on Australia’s 10-year treasury note slumping 2 basis points to 2.551 percent. (Note: Bond yields are inversely correlated with bond prices, therefore this signifies increasing demand for bonds). The yield on 30 year bonds also decreased 2 basis points to 3.056 percent and the yield on short-term 2-year traded 1.5 basis points lower at 1.984.

Other Assets:

On Thursday ANZ announced an out of cycle rate rise in the standard variable rate by 16 basis points. CBA followed suit mere minutes later, announcing their own variable rate hike of 15bps. Both banks cited increased funding costs as the reason for their hikes. Coupled with reduced lending activity from the banks, a continuation of the modest downtrend in property prices can be expected.

Whilst this is unfortunate for property investors, this period of retracement should be considered as a necessary evil. The property boom was becoming unsustainable with questionable lending practices leading to exorbitant debt levels, and in too many cases, unserviceable loans. This controlled pullback is helping to set strong foundations for sustainable property, and preventing a more violent crash in the future.


Sources: Reuters, CNBC, Bloomberg, Business Insider, Financial Review, SMH, The Economist

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