Global market outlook
Global shares are still favoured for 2015 given their attractive valuations and the very easy monetary policy stance of central banks. Global shares are much more appealing on a risk-reward basis compared to very low government bond yields. While there is the prospect of a significant global share correction sometime in 2015, low global interest rates and gradually improving global growth should remain strong positives for global shares. The known threats from higher US interest rates, Greece’s potential euro exit, geopolitical risk in the Middle East and the Ukraine, as well as China’s growth slowdown appear to be manageable for now. Accordingly, global shares should deliver solid returns in 2015 allowing for temporary bouts of turbulence.
Australian shares have more modest immediate prospects for 2015 than their global counterparts. Lower commodity prices given China’s growth slowdown and concerns about the Abbott Government’s plans for closing the federal budget deficit seem to be capping risk appetites. The mining sector in particular is struggling with falling iron ore prices and Standard & Poor’s warning of possible credit rating downgrades. The ASX 200 seems to be facing formidable resistance approaching the 6000 level given these concerns. For the immediate term, Australian shares are likely to tread water until there are more encouraging signs regarding commodity prices and the federal budget as well as the Reserve Bank of Australia (RBA) cutting interest rates further.
Low government bond yields presently are likely to give subdued returns from bonds over the next year. Given the prospect that the US Federal Reserve will start a gradual interest rate tightening cycle in the next six to nine months, rising global bond yields are likely to be a key issue and feature in 2015.
Headline developments of the past week
China’s growth slowdown continued into the opening quarter of this year. China’s economic growth slowed to a 7% pace in the March quarter. This is not alarming for the global economy given that this has been anticipated and accords with the Chinese Government’s 7% growth target for 2015. However, China’s sharp monthly activity slowdown is more concerning for Australian commodity producers. China’s industrial production slowed to only +5.6% annual growth in March which indicates very subdued demand growth for Australia’s key commodities of iron ore and coal. China’s retail sales growth at +10.2% has been more resilient and suggests that China’s difficult transition to a more consumer-driven growth path is still on track.
American economic activity now appears to be warming up after a cold start in the opening months of 2015. US nominal retail sales rebounded by +0.9% in March after the weak performances of January (-0.8%) and February (-0.5%). The harsh winter weather kept American consumers captive in their houses at the start of the year, but now these consumers seem to be returning to the shopping malls. US housing starts also rebounded in March by +2%, however this is a mild rebound considering the -15% fall in February.
Greece appears to be edging closer to a sovereign debt default. Greece’s Finance Minister stated that Greece is prepared to “compromise” but not “be compromised” on budget targets set by the European Commission, European Central Bank and International Monetary Fund (IMF). So the Greeks are basically doing a sirtaki dance towards exiting the euro rather than play the ‘extend and pretend’ role in debt negotiations.
The IMF maintained its 2015 global growth forecast at 3.5% for 2015. However, there were some significant changes to the individual country forecasts. America’s growth has been downgraded by -0.5% to 3.1% in 2015 given the recent slower activity data. Yet this is still an optimistic US growth view based on “accommodative monetary policy stance” and “lower oil prices”. Europe’s growth has been upgraded by 0.3% to 1.5% in 2015. Europe’s activity should be supported by “low interest rates and a weaker euro”. China’s growth forecast was held steady at 6.8% in 2015 but the IMF did highlight that China should see a “slowdown in investment” particularly in real estate. India’s growth forecast was upgraded by +1.2% to 7.5% given “policy reforms, a consequent pick-up in investment and lower oil prices”.
What to watch over the week ahead?
Australia’s inflation result for the March quarter is expected to show modest price pressures. Slow wages growth and competitive pressures in the retail sector are expected to see annual inflation at only 1.5 %. This mild inflation result will come despite the Australian dollar’s sharp decline which normally would pass through into higher prices. For the RBA, this mild inflation result which is below their 2% to 3% inflation target should give scope for another interest rate cut in May.
American, European and Japanese manufacturing business surveys for April should provide a timely update on economic activity and the impact of recent currency swings. American manufacturing is currently challenged by a strong US dollar whereas Europe and Japan are benefiting from currency weakness.
Major global economic releases and implications
China’s price pressures remain mild with March’s consumer price index (CPI) showing annual inflation at 1.4%. This gives China’s central bank scope to further lower interest rates in coming months after the recent cuts of November 2014 and February 2015.
India’s CPI is similarly showing milder annual inflation at 5.2%, although the Indian central bank will be more cautious in cutting interest rates immediately.
European industrial production rose solidly in March by +1.1%. Notably, this is in contrast to American manufacturing production which only gained +0.1% for March. So the falling euro and rising American dollar appears to be shifting manufacturing activity in favour of Europe.
The European Central Bank (ECB) held monetary policy steady with the key interest rate at 0.05% and monthly asset purchases at €60 billion. ECB President Mario Draghi noted the European economic activity has “gained further momentum since the end of 2014”.
Australian economic releases and implications
Australia’s labour market achieved strong job gains of +37,700 in March. This follows a revised February gain of +42,000 jobs. Australia’s unemployment rate edged down by 0.1% to 6.1% in March. This is a three-month low and suggests that the unemployment rate is now stabilising. Notably, Australia’s annual employment growth at +1.6 % is now matching labour supply growth of circa 1.7%. Yet the RBA is still likely to lower the cash interest rate by 0.25% to 2.0% in May. This Australian Bureau of Statistics monthly labour force data is volatile and there were significant revisions in 2014 given survey problems. Recent reports of significant job losses in the mining sector and the decline in April’s Westpac-Melbourne Institute consumer sentiment survey should prove more persuasive to the RBA Board than this March labour data.
Consumer sentiment as measured by the Westpac-Melbourne Institute survey slipped by -3.3 points to 96.2. This is a disappointing result. Perhaps sentiment was adversely impacted by the RBA holding interest rates steady at April’s meeting or consumers are showing concern over the coming federal budget in May. Notably the expectations component of sentiment fell sharply. The survey response to “economic conditions next 12 months” declined by 6.7% in April while responses on “economic conditions for next five years” fell by -10.2%. So Australian consumers seem to be more cautious regarding the future.
In more encouraging news, the National Australia Bank (NAB) business survey recorded solid gains for both business confidence (from 0 to +3) and business conditions (from +2 to +6) in March. The NAB commentary noted that the rise in confidence is mainly due to a “particularly large jump in mining confidence (up 29)”. By contrast, the retail sector confidence reading fell “into negative territory for the first time since mid-2013”. The NAB attributes this to “uncertainty over government policy” and “cost of living pressures” for consumers. Business conditions “jumped to 6 points which is above the monthly survey average of +4”. There was a noticeable surge in the profitability reading (from +2 to +8) and trading component (from + 5 to +10). Business conditions appear to be benefiting from very subdued wage pressures.
Major market moves
Global shares have had a mixed week. American shares (S&P 500) so far have been flat. Both Germany’s DAX (-1.4 %) and the broader European Eurostoxx index (-0.8%) have fallen given concerns over Greece. Japan’s TOPIX is flat while China’s Shanghai Composite continues to surge, up by +6.8% for the week.
Australia’s ASX 200 slipped by -1.5% for the week. Australian shares were weighed down by the weakness in commodity prices and the reduced probability of the RBA cutting interest rates after the strong March jobs result.