Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist
Investment markets and key developments over the past week
Despite concerns about the near term to threat to growth from lockdowns in Europe and the US, most global share markets rose further over the last week helped by positive news regarding a vaccine for coronavirus. For the week US shares rose 2.2% and closed at a record high, Eurozone shares rose 6.4% and Japanese shares rose 4.4%. Chinese shares were the exception and fell 0.6%. Australia shares rose sharply again with a 3.5% gain helped by the positive global lead, a surge in energy stocks on the back of higher oil prices, corporate restructuring pushing up Telstra and strong gains in industrial, financial and property stocks. Bond yields rose reflecting the risk on tone despite talk of more monetary easing in Europe and the US. While gold prices fell, oil, metal and iron ore prices rose. The A$ rose slightly despite a rise in the US$.
Major global share markets and Australian shares have broken higher over the last two weeks – potentially opening the way for more upside. US shares rose to a new record high, Eurozone shares have broken above the range they have been in since June, Japanese shares have broken well above pre-coronavirus levels to their highest since the early 1990s and Australian shares have broken out of the consolidation they have been in since June. US election uncertainty and coronavirus lockdowns could upset this in the very short term but it’s all consistent with ultra-easy monetary policy, massive fiscal stimulus and the recovery in economies and profits getting a boost next year as vaccines are deployed against the background of normal seasonal strength that kicks in over the next few months. We continue to see more upside for the Australian share market over the next 6 to 12 months.
The past week saw very good news on the coronavirus vaccine front with early results from Phase 3 testing of a Pfizer/BioNTech vaccine showing 90% effectiveness within the first month of receiving the vaccine. 90% effectiveness would be at the high end of vaccine success and would contrast with flu vaccines which are often just 50% effective (due to multiple strains of flu). The combination of massive policy stimulus along with the successful deployment of vaccines raises the prospect of a supercharged rebound in the global and Australian economies in 2021. That said there is a fair way to go yet. The results are yet to be peer reviewed, we don’t know how long protection lasts and whether there may be resistant strains of coronavirus (via Minks?), more results are needed regarding the vaccine’s safety and while distribution could start in months if its approved it will probably take at least 6-9 months for broad enough coverage in developed countries (longer for the whole world) to get back to normal.
Meanwhile, the problem right here right now is that we are continuing to see a surge in global coronavirus cases. Emerging countries have been faring better lately (although I wonder about how reliable that is). Europe looks to be seeing a slowing in new cases possibly reflecting tightening lockdowns – with clear falling trends now in Belgium and the Netherlands and tentative signs of a slowing in Spain, France and Germany. However, there is no sign of any slowing in the US (which is now running at the rate of a million new cases every 8 days) and even Japan looks to be going through a third wave.
While deaths in the US remain well below prior peaks the rise in hospitalisations to a new high is putting increasing pressure on the medical system indicating a rising risk that as we have seen in Europe some areas in the US may be forced to tighten restrictions despite political and economic opposition. In fact, we are already starting to see that in various cities and states. While President Trump has said “this Administration will not be going to a lockdown”, a Biden Administration may take a tougher more comprehensive stance early next year to this if new cases haven’t started to trend down by then.
Reflecting the latest rebound in cases and pressure on hospital systems the proportion of countries in severe lockdowns is still rising, albeit for the most part they are not as severe as seen earlier this year.
European economic data is slowing down again in response to the surge in new coronavirus cases seen since August and more recently the return to lockdowns. This is evident in our (newly constructed) European Economic Activity Trackers which are seeing a broad-based slowing.
Our US Economic Activity Tracker dipped again with broad based weakness over the last week adding to the likelihood that the resurgence of new coronavirus cases in the US is starting to slow the economy.
Australia is continuing to see new coronavirus cases stay very low with hardly any cases of community transmission and deaths have collapsed. Our Australian Economic Activity Tracker rose further over the last week and is trending up nicely helped by Victoria’s reopening consistent with ongoing recovery. Credit card transactions have accelerated sharply (driven by Victoria and NSW) in the last week or so but the gains in the Tracker have been broad based.
President Trump hinting he might have been the loser – but still yet to concede. In normal times, the US election would be fading into history and we would be solely focussed on what a Biden Administration will mean. But with Comedian and Super-Spreader in Chief Trump these are not normal times. (Note that one study linked over 700 Covid-19 deaths to Trump rallies and that was just up to September.) Meanwhile, Biden is now more than 5 million votes ahead of Trump and with some news networks calling Georgia for Biden looks like winning with up to 306 electoral college votes. Normally the loser would have conceded by now but Trump never committed to accepting the result if it went against him and set up grounds to discredit it months ago by claiming mail in votes were fraudulent (as he knew Biden voters were more likely to vote via the mail). So, his refusal to concede is not that surprising. Trump’s strategy appears to be a combination of: hoping that he wins Arizona where Biden’s lead has fallen to 0.3%; legally challenging results in Pennsylvania, Michigan and Wisconsin; possibly convince the Georgia Secretary of State to refuse to certify its result (which is now being recounted under Georgia law anyway); maybe convince Republican state legislatures that the result was fraudulent so they should appoint their own pro-Trump electors to go to the electoral college vote; and maybe get the House of Representatives to vote on who won.
However, this strategy appears to be crumbling with Trump appearing to acknowledge a “very close loss” in Arizona, Trump’s legal challenges seeing setbacks in Pennsylvania, Michigan and Arizona and various state and federal election authorities claiming “utmost confidence in the security and integrity” of the vote. While comparisons are being made to the year 2000 challenge to George W Bush’s result, Al Gore was only around 500 votes behind Bush in Florida whereas Trump is 11,000 votes behind in Arizona, 14,000 votes behind in Georgia, 21,000 votes behind in Wisconsin and 63,000 votes behind in Pennsylvania. Even Trump himself has hinted for the first time that he might have lost stating on Friday that “whatever happens in the future, who knows which administration it will be, I guess time will tell” although he still hasn’t conceded. It’s funny that the Republicans are not challenging their better than expected results in the House and Senate – even though they were part of the same vote!
Trump’s refusal to concede and unsubstantiated allegations of election fraud are just creating more division in the US and trashing the US’ reputation as a democracy. But if as is increasingly looking likely Trump’s options are exhausted without success senior Republican’s (who are currently standing by him so as to keep his supporters fired up to come out in the Georgia senate run offs on 5th January) will likely desert him in order to save their own reputations. Trump may be starting to come around to accepting his defeat, but it could still take weeks to finally resolve although states have until December 8 to certify the results and the electoral college votes on December 14. So far markets don’t seem too fussed, but it could create some volatility along the way, particularly if it is seen as preventing more fiscal stimulus in the face of the threat to the US economy from rising coronavirus cases.
Should people who work from home be levied a higher tax rate – either directly if they choose to work from home or their companies if they force them to? I saw a suggestion along these lines in an article based on a Deutsche Bank report. The logic is simple – people who work from home get a benefit in terms of better work/life balance, less travel time, etc and save money in the process which hurts the economy so maybe they should pay for that benefit via a tax. At first, I thought yeah maybe. But then it could be argued they are good for the planet as they contribute less to carbon pollution by commuting less so maybe they should get a tax cut! More fundamentally it’s a whacky idea because if there was a benefit in working from home market forces will work out what it is and it will be priced into wages (ie lower wages relative to those who have to go to into work), the financial saving from working from home will be re-allocated to other forms of spending (like less on wasteful commuting costs and more on holidays) and why should the government need to intervene in all of this with an arbitrary tax. So, the answer I think is no!
Last week I neglected to mention that Kylie released a new album, Disco. Say Something was released as a single several months back but Miss a Thing is another cool song from the album. If you are into the California folk/pop/rock sound there are two documentaries on the music scene in Laurel Canyon in the 1960s and early 70s called Echo in the Canyon and Laurel Canyon – both are excellent.
Major global economic events and implications
In the US, small business optimism remained solid in October and jobless claims fell but job openings were a bit weaker than expected and core CPI inflation fell to 1.6% year on year. Fed Chair Powell expressed medium term optimism about a vaccine but near-term concern regarding rising coronavirus cases and indicated that the Fed may need to ease more – the lately is most likely to come in terms of more QE.
Much like what is occurring in Australia, US mortgage delinquencies fell in the September quarter but remained high but bank forbearance (the equivalent of bank payment holidays) is keeping foreclosures low.
ECB President Lagarde’s comments at an ECB Forum were very dovish hinting that an expansion in the Pandemic QE program and more cheap bank funding is likely to be announced in December reflecting the need for central banks to fill the gap until a vaccine is deployed.
UK GDP rebounded 15.5% in the September quarter, following a 19.8% slump in the June quarter, but looks likely to contract again this quarter reflecting its latest lockdown.
Japan’s Economy Watcher’s survey improved further in October pointing to ongoing economic recovery.
The RBNZ announced a cheap bank lending for funding program but appears to be backing away a bit from negative interest rates.
Chinese data for October was mixed, with a surge in exports, but weaker than expected imports (mainly due to less oil and chip imports) and some slowing in monthly credit growth. Consumer price inflation slowed further and producer prices remain in deflation.
Australian economic events and implications
Australian consumer and business confidence are continuing to rebound with the Westpac/MI consumer confidence index at its highest level since 2013 and the NAB measure of business confidence well above pre-coronavirus levels. Reopening is a big part of this as is the level of government support and the latest RBA easing all of which have preserved businesses, jobs and incomes which in turn adds to confidence that businesses will hire and ultimately invest and households will continue to run down the huge June quarter spike in saving. The Government’s decision to extend the JobSeeker supplement albeit at the reduced rate of $150 a fortnight (which leaves the total JobSeeker payment at $51.1 a day) combined with the continuing drip feed of other measures will add to this. There is a good chance that JobSeeker will ultimately end up locked in at $51.1 a day which is low but still far better than the pre-coronavirus rate of $40.4 a day.
What to watch over the next week?
In the US, the election outcome and Trump’s desperation to reverse it will continue to figure highly. On the data front expect to see continued solid November readings for the New York and Philadelphia regional manufacturing conditions indexes (due Monday and Thursday), solid growth in October retail sales and industrial production and continued strength in home builders’ conditions (all Tuesday), further gains in housing starts (Wednesday) and still high home sales (Thursday).
Japanese GDP (Monday) is expected to have rebounded by 4.4% in the September quarter after the shutdown driven slump of -7.9% in the June quarter. November’s business conditions PMIs will likely show a further recovery and core CPI inflation (both due Friday) is likely to have fallen to -0.3%yoy in October.
Chinese activity data for October due Monday is likely to show continuing solid growth in industrial production and a further acceleration in retail sales and investment.
In Australia the minutes from the last RBA Board meeting (Tuesday) and speeches by RBA Governor Lowe are unlikely to add much after the further easing seen this month but are likely to reiterate that the RBA expects economic recovery to continue but that it will be bumpy and uneven and that it stands read to do more if needed. Recent positive news regarding a vaccine may suggest upside risks to the RBA’s growth forecasts if a vaccine can be rolled out earlier than expected. On the data front in Australia, expect September quarter wages growth (Wednesday) of just 0.1% quarter on quarter or 1.4% year on year which will be the lowest annual growth rate on record, labour force data for October (Thursday) to show a 30,000 decline in employment and unemployment rising to 7.3% as people continue to return to the workforce and October retail sales (Friday) to show a 1% rise helped by some reopening in Victoria. Payroll jobs data for the period to 17th October will also be released on Tuesday.
Outlook for investment markets
Shares remain vulnerable to further short-term volatility given uncertainties around coronavirus, economic recovery and President Trump. But we are now into a seasonally strong period of the year for shares and on a 6 to 12-month view shares are expected to see good total returns on the back of ultra-low interest rates and a pick-up in economic activity helped by a possible vaccine.
Low starting point yields are likely to result in low returns from bonds once the dust settles from coronavirus.
Unlisted commercial property and infrastructure are ultimately likely to benefit from a resumption of the search for yield but the hit to economic activity and hence rents from the virus will weigh heavily on near term returns.
Australian home prices at present are being boosted by ever lower interest rates, government home buyer incentives, income support measures and bank payment holidays but higher unemployment, a stop to immigration and weak rental markets will likely weigh on inner city areas and units in Melbourne and Sydney into next year. Outer suburbs, houses, smaller cities and regional areas are in much better shape.
Cash & bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.25%.
Although the A$ is vulnerable to bouts of uncertainty about coronavirus, the economic recovery and China tensions and RBA bond buying will keep it lower than otherwise, a continuing rising trend is likely to around US$0.80 over the next 12 months helped by rising commodity prices and a cyclical decline in the US dollar.
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