MARCH MARKET UPDATE*

Written by Nigel Singh, Chief Operating Officer, IPS

Trade tensions between the United States and China appeared to improve somewhat in February. The Trump administration delayed the implementation of increased tariff rates, which had been scheduled to rise from 10% to 25%, citing “substantial progress” in negotiations. Discussions have led to memoranda of understanding on six disputed points, but no final deal has been reached. Progress in the trade negotiations contributed to improving market sentiment with equities rallying through January and February after the worst December for the US equity market since the 1930s. In fact, the Dow Jones index rose by 11.1 per cent, posting the best two-month start to a year since 1987.

However, as we turned over into March, major global share markets fell over worries about global growth, with US shares down 2.2%, Eurozone shares down 1.3%, Japanese shares losing 2.7% and Chinese shares down 2.5%. Australian shares pushed 0.2% higher though on increasing expectations for rate cuts offsetting, for now, the negative impact of slowing growth. Bond yields fell as the ECB announced more monetary easing and on growth worries. Commodity prices were mixed, with metals and iron ore down but oil and gold up. The $A fell on increasing expectations for RBA rate cuts as the $US rose.

Just a few months ago, the European Central Bank put the brakes on a vast economic stimulus program devised during the financial crisis. In early March, it unexpectedly reversed course and revived some of the measures, signalling the rising threat of a recession. The quick turnabout, from confidence to concern, reflects the broader weakness in the global economy. Europe has been particularly vulnerable to global forces, given the turmoil at home. The uncertainty over Britain’s exit from the European Union has put pressure on the British economy, while Italy and Spain have been shaken by their own political fissures.

The Brexit saga continues. Theresa May’s EU withdrawal deal has been rejected by MPs by an overwhelming majority for a second time, with just 17 days to go to Brexit. MPs voted down the prime minister’s deal by 149 – a smaller margin than when they rejected it in January. Mrs May said MPs will now get a vote on whether the UK should leave the EU without a deal and, if that fails, on whether Brexit should be delayed. Watch this space.

Minutes from the Federal Open Market Committee (FOMC) that met on January 29-30th were released in February. In the minutes, the Fed restated their patient approach on policy. Of note, the minutes reflected Fed discussions about ending the balance sheet run-off later this year. Further, in the minutes the FOMC members suggested that keeping the Fed Funds rate in its current range of 2.25% – 2.50% “posed few risks at this point.” As of February 28, Fed Funds Futures project neither rate hikes nor rate cuts in 2019. Chairman Powell presented the Fed’s Semiannual Monetary Policy Report to Congress on February 26 and 27. In the report, he highlighted healthy economic conditions, but remarked that the conditions are “less supportive of growth than they were earlier this year.” He noted current limited inflationary pressures as allowing increased flexibility on rate hikes and again reiterated the Fed’s patience with regard to policy. In reminding Congress of the Fed’s independence, Powell indicated Fed actions would proceed “without concern for short-term political considerations.”

Here in Australia, economic growth slowed again in the December quarter rounding off what was a weak performance for the Australian economy in the second half of last year pushing us into dangerous territory with a per-capita recession. According to the Australian Bureau of Statistics, the economy grew by 0.2% in seasonally adjusted chain volume terms during Q4’18, undershooting forecasts for an increase of 0.3%. Australia has only experienced this three times since the 1990s — once in 2000 (when the GST was introduced), again in 2006 and lastly now.

Evidently, no one remembered to tell the market that we were having a slowdown! Overall, the Australian stock market had one of its strongest months on record in February with the ASX 200 gaining 5.2% for in February almost double global developed markets (+2.8%) and climbing 3.9% in January (despite investors keenly awaiting the impact of the Royal Commission on Banking names).

However, despite the strong start to the year in equities, the spectre of the property market continues to loom ominously. Sydney and Melbourne house values have retreated to 2016 levels as signs grow the fall in property prices is spreading across the rest of the country and depressing the number of homes on the market. Figures from analysts CoreLogic showed house values in Sydney dropped by 1.1 per cent in February to be down 11.5 per cent over the past 12 months. Melbourne values tumbled by 1.2 per cent and 4.8 per cent over the past quarter, making it the softest capital city market in the country. Over the past 12 months, house values have dropped by 11.5 per cent. Dwelling values in Sydney are now back to July 2016 while in Melbourne they have retreated to their November 2016 level.

The housing uncertainty was referenced in the March RBA Board Minutes as it kept the official cash rate at its record low of 1.5 per cent for the 28th time in a row. “The main domestic uncertainty continues to be the strength of household consumption in the context of weak growth in household income and falling housing prices in some cities,” the board said in its statement.

“The central scenario is still for the Australian economy to grow by around 3 per cent this year,” the board said pointing to rising business investment, higher levels of spending on public infrastructure and increased employment.

Economists at most banks are predicting the Reserve Bank will be forced to cut interest rates twice this year in order to stimulate the slowing economy, with JP Morgan and Nomura predicting the first reduction as early as this July.

*as at March 12 2019

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