A mix of more good news than bad on the macroeconomic front eases downward pressure on global markets
Share markets continued their recovery over the last week helped along by expectations that “Goldilocks” conditions will prevail, with a further slowing in US inflation leaving the Fed on track to cut rates and reasonable economic data helping allay recession fears for now. US shares rose 3.9% for the week making it their strongest week for the year, Eurozone shares rose 3.1% and Japanese shares gained 8.7%.
Chinese shares rose 0.4% supported by hopes for more policy stimulus after more soft economic data. Helped by the positive global lead and a reasonable start to the June half profit reporting season, Australian shares rose by 2.5% with gains led by IT, retail and financial shares but mining stocks down on the back of lower iron ore prices.
Bond yields fell in the US, UK and Australia, were flat in Germany and rose slightly in Japan. Oil prices fell but only by 0.2% as uncertainty remains around whether Iran will retaliate for Israel’s assassination of Hamas’ leader in Iran. Copper and metal prices rebounded, and the gold price rose to a record high, but the iron ore price continued to slide on worries about Chinese demand. The $A rose and the $US fell consistent with the “risk back on” tone in other financial markets.
Shares remain at high risk of further falls and volatility over the next few months. Shares have seen a strong rebound from their lows earlier this month, recovering about two thirds of their losses. They have been helped by ongoing indications of central bank rate cuts, okay US economic data and mostly good earnings results. Further gains are possible, particularly as US data is unlikely to indicate recession is upon us just yet.
However, shares remain vulnerable to further volatility over the next few months as: valuations remain stretched; investment sentiment is still relatively upbeat (with VIX or the “fear index” back to late July levels) which is negative from a contrarian perspective; recession risk is high in the US and Australia with forward looking jobs indicators pointing down; and geopolitical risk is high particularly around the US election and the Middle East; and we have only just started in the seasonally weak period of August and September which can sometimes extend into October/November in US election years.
The good news though is that the drum beat of global rate cuts continues with nearly a third of global central banks now cutting rates.
Shane Oliver (AMP Capital)
