Global equity markets went on a rollercoaster ride last week suggesting there was overselling but still concerns on the macro-economic front remain
(AMP Capital) Following a bad start to last week on worries about a US recession made worse by investors rushing to unwind risky positions in response including Yen carry trades, shares then clawed back their losses helped by better-than-expected US economic data and comments from the Bank of Japan that it will not raise rates in “unstable markets.” This left Eurozone shares up 0.6% for the week, US shares flat (or -0.04% to be precise), but Japanese shares down 2.5% and Chinese shares down 1.6%.
Australian shares managed to recover some of their loses from the 3.7% panic sell off on Monday but still fell 2.1% for the week. Bond yields rebounded as safe haven demand was unwound and expectations for emergency central bank rate cuts were wound back, with the exception being Japanese bond yields which fell on the back of dovish BoJ comments. Oil prices rose on uncertainty around escalating Israel/Iran tensions, but copper and iron ore prices fell on concerns about global growth. The Australian dollar rose, with a slight fall in the US dollar.
Shares could bounce a bit further but remain at high risk of further falls over the next few months. From their recent highs to their lows US and global shares had roughly 9% falls and nearly 6% for Australian shares. While it was dramatic such falls are not unusual in an historic context. Of course, shares rarely go in a straight line so after the falls left them oversold they have had a bounce helped by some better-than-expected US economic data and dovish BoJ comments. The bounce could run a bit further, particularly as US economic data beyond the rise in unemployment is still not indicating that a recession is upon us. Its also a bit confusing as the triggering of the Sahm Rule was due to a surge in the supply of workers not lots of layoffs and may have been impacted by Hurricane Beryl.
US and global profits have been strong in the June quarter at around +10%yoy. Similarly in Australia economic data is still not yet consistent with a recession. However, shares remain vulnerable to further falls over the next few months as: valuations remain stretched; investment sentiment is not yet at levels that signal major market bottoms; recession risk is very high in the US and Australia with forward looking jobs indicators pointing down and markets are not priced for this; and geopolitical risk is high particularly around the US election and the Middle East (with a high risk of escalation between Iran and Israel after the assassination of Hamas’ leader in Iran); 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 last two weeks provide an indication of how sensitive investors are to weaker economic data at present.
The RBA left rates on hold but is surprisingly hawkish and guiding against a rate cut this year. While the RBA reiterated that its “not ruling anything in or out”, it now sees slightly more excess demand in the economy, it revised up its growth forecasts and now sees a slightly slower return of underlying inflation to target, it gave “very serious consideration” to another hike but not a cut and Governor Bullock noted that “interest rate reductions by the end of the year and the next six months…doesn’t align with the [Board’s] thinking…at the moment”.
Governor Bullock added later in the week that it “will not hesitate” to hike again if inflation remains persistently high. This hawkishness was a bit surprising given that in the last few months economic growth came in weaker than expected and inflation was broadly in line with RBA forecasts, the RBA’s near-term wage growth forecasts have been revised down and uncertainty regarding growth in China and the US has increased.
Shane Oliver (AMP Capital)
