19 November 2014

Weekly Market Update ~ week ending 7 November 2014

weekly market update
Investment markets and key developments over the past week
  • Shares were mixed over the last week with US shares up 0.7%, Japanese shares up 2.8% and Australian shares up 0.4% helped along by continuing reaction to the increased stimulus in Japan, good profit results in the US, the Republican win in the US Congress and very dovish comments from the European Central Bank (ECB), although European shares fell 1.1% and Chinese shares fell 0.1%. Bond yields were little changed. Meanwhile, the US dollar had another leg up and this weighed on commodity prices and the Australian dollar which fell to its lowest level since 2010.
  • Republican control of the US House and Senate after the midterm elections is a positive for the US and US assets. While the knee-jerk reaction has been that this means ‘gridlock’ in Washington, our view is the exact opposite given that: the Senate Democrats who had been a roadblock for Obama are now sidelined, the Tea Party influence on the Republicans was weakened last year (as they were seen as to blame for the Government shutdown), both sides will want to appear constructive ahead of the 2016 Presidential election and President Obama will want to leave a positive legacy. This all points to Washington being less of a negative ahead with deals likely on government funding, the debt ceiling (necessary early next year), corporate tax reform and trade. Mitch McConnell, the new Senate leader, has said there will be “no government shutdowns and no default”.
  • No doubt in the ongoing search for something to worry about the rising trend in the US dollar and its implications for US shares will soon be on the list. The direct impact from a rising US dollar is negative for US company earnings as something like 40% of US earnings are sourced offshore. A rising US dollar will also be a source of ongoing downwards pressure on commodity prices and it has the potential to create problems for some emerging countries given the risk of capital flight with South America being most at risk here. However, there are several counters. Firstly, after a 30% or so fall since 2002, so far the US dollar has really just had a flick off the bottom. Secondly, to the extent that a rising US dollar is a de facto monetary tightening it could delay the timing of the first US Federal Reserve (Fed) rate hike and/or the amount by which rates go up. And thirdly, it’s largely going up because the US is relatively strong and this strength is boosting US earnings (much like the rise in the Australian dollar last decade was associated with relative strength in Australia and the Australian share market at the time, until of course the Australian dollar ultimately ended up going too far). So I don’t see a rising US dollar as being a major problem, at least not until it goes a lot further.
  • In Australia, there were no surprises from the Reserve Bank of Australia (RBA) which left interest rates at a record low for the 16th month in a row and provided no early warning of any imminent change by retaining its comments that a “period of stability in interest rates” remains prudent. Given that the RBA continues to project sub-trend growth and benign inflation in its quarterly Statement of Monetary Policy a rate hike remains a long way off, probably not until mid-next year at the earliest. This is particularly so if the RBA proceeds with credit controls to slow lending to investors for housing as it will remove the one argument supporting a rate hike, i.e. house price strength.
  • Risks worth keeping an eye on are Ukraine where escalating clashes indicate the ceasefire is unravelling, and Catalan pressure for independence from Spain following an unofficial weekend referendum.

Please click here to read the full article:  Weekly Report ~ 7 November 2014

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