Weekly Blog

Equity markets slide as virus cases rise

MARKETS

Local and global equity markets weakened this week as the US failed to pass any new stimulus and rising virus cases in Europe saw significantly increased restrictions.

In local stock news, Rio Tinto’s September quarter iron ore production improved to be slightly below the same period last year as staff returned to pre-virus work rosters. Production year to date is running slightly ahead of the same time last year. BHP posted a 7.2% rise in iron ore production in the quarter, supported by strong demand from China.

Westpac Bank said it would sell its 10.7% stake in Zip Co whilst also confirming a court has approved its $1.3 billion fine for breaching anti-money laundering rules.

The Aussie dollar had a mixed week, falling early in the week on increased likelihood of RBA stimulus at the November meeting, but then rising late in the week on the back of some strong economic data out of China.

ECONOMIC

Preliminary estimates have Australian retail trade falling by 1.5% in September. Falls were recorded in food, household goods and clothes, whilst spending on department stores and eating out rose. Consumers possibly getting thriftier in light of tapering JobKeeper and JobSeeker payments. In annual terms, retail trade sits 5.2% higher over the year.

Australian Bureau of Statistics data showed that just under a 1/3^rd of businesses reported a fall in monthly revenue in October, compared with nearly half in July, whilst 7% reported a decrease in their number of employees versus 13% three months earlier.

A key US central bank member made comments that caught some by surprise. He indicated that there is now an open question as to whether there will be an indefinite need for the US central bank to keep buying US bonds (QE) to support market function given how big the US bond market has become, which may be too large for private investors to absorb, thus resulting in higher borrowing costs for the US government. Most people in the know expect this to be the case anyway. Maybe the member’s brazenness caught people by surprise instead.

US retail sales in September far outstripped expectations and consumer sentiment for October has come in better than expected. However, the lack of new government stimulus may reverse some of these gains.

Data showed that the number of Americans filing for unemployment benefits last week dropped more than expected to 787,000, but still remains very high, especially in the absence of any new stimulus.

Key Chinese economic data was released with the economy growing 4.9% in the September quarter from a year earlier, which was lower than expectations for 5.2% rise. Industrial output rose strongly in September, consolidating the strong August numbers. Retail sales grew 3.3% which was significantly better than August numbers.

POLITICS

Looks likely the Chinese government is now targeting Australia’s cotton industry with China apparently discouraging its spinning mills from using Australian imports. The development follows reports that China has suspended purchases of Australian coal. The last time they restricted Australian coal in February 2019 was due to the Australian Government’s restrictions on Huawei.

Whilst we saw increased virus restrictions throughout Europe, as the Europeans realised that normal summer vacationing probably wasn’t the best idea, we still haven’t seen a corresponding surge in hospitalisations and/or deaths. As such, any increased restrictions should be measured, targeted, and temporary. Ireland disregarded that, locking down all non-essential businesses for 6 weeks. Interestingly, Sweden is seeing no increase in cases. We saw declining new cases closer to home with NSW & VIC lifting more restrictions whilst NSW is allowing in NZ travellers. The other states need to move towards lifting border restrictions. Pfizer, one of the companies developing a vaccine, announced it could apply for US authorisation for their vaccine in November.

European Union leaders refused to make any further concessions over post-Brexit trading arrangements with the UK, putting pressure back on UK PM Boris Johnson to honour the terms of the withdrawal agreement signed last year. Not looking good for the UK and their economy.

Fresh new US fiscal stimulus remains unlikely even though the Treasury Secretary told House Speaker Pelosi that President Trump would lean on his party to sign in a stimulus package if agreed to by Democrats and the Trump administration. Senate Majority Leader McConnell rejected Trump’s assertion, risking Trump’s ire, saying that he could not sell a larger package to his members but that the Senate would vote on a smaller package next week. Tough game. American people need more stimulus, and that stimulus needs to be purposeful not wasteful, all whilst politicians are seeking re-election.

General Advice Warning

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

Aussie shares rise on expected RBA stimulus

MARKETS

The Australian equity market rose this week as investors continued to digest the Federal Government’s huge budget whilst the RBA Governor seem to indicate that more stimulus will be provided at the November meeting. Declining virus cases in Victoria also supported investor sentiment.

Global equity markets fell this week as concerns arose regarding a broader European lockdown with virus cases escalating, whilst US lawmakers failed to reach agreement on fresh new stimulus.

The Chinese central bank has made changes to currency requirements to stop the Chinese Yuan from rising any further. The measures were previously put in place to stop the decline in the currency, but the recent strong falls in the US dollar have seen the Yuan rise too strongly. All governments and central banks want their currencies lower – a race to the bottom.

The Aussie dollar fell this week as China seemed to restrict the import of Australian coal and the RBA Governor laid the groundwork for a rate cut and more bond buying at their November meeting.

ECONOMIC

A key speech by RBA Governor Lowe seems to have locked in a rate cut at the November meeting, from 0.25% to 0.10%. This will likely extend to the rate the RBA lends money to the banks and the Government’s 3-year bond yield which the RBA is currently fixing at 0.25%. In addition, the speech seems to pave the way for more traditional quantitative easing (QE), where the RBA will be printing money to buy longer dated Government bonds in order to lower their yields. Both measures should also put a cap on any significant Aussie dollar rise from here.

Australian employment fell by 29,500 in September whilst hours worked lifted by 0.5% in the month. Most of the fall in employment came from Victoria with more than 35,000 jobs lost. The unemployment rose to 6.9% whilst the underemployment rate rose to 11.4%.

The value of all housing related lending surged by more than 12% in August, with strong growth across owner occupiers, investors, and first home buyers. Annual growth is almost 20%. Record low interest rates and lack of supply are combining support house prices, outside of Victoria.

Commonwealth Bank said the number of their loans with deferred repayments dropped by 45,000 ($17 billion) by the end of September to 129,000 loans ($42 billion). Better signs, but repayment extensions were also given to 17,300 customers.

Australian consumer sentiment lifted by almost 12% in October to its highest level since July 2018. The lift was somewhat expected given the significant Federal Budget handed down, but came in much higher than expected, with the rise driven by future expectations in response to personal income tax cuts. Confidence in the housing market also strengthened whilst jobs security also improved.

The International Monetary Fund is forecasting global growth to shrink by 4.4% in 2020 (prior forecast of minus 5.2%) before expanding by 5.2% in 2021 (5.4% previously). They expect the Australian economy to contract by 4.2% in 2020 (minus 4.5% previously) with growth of 3% in 2021 (4% previously).

POLICTICS

Australia’s Trade Minister is investigating reports China has suspended the imports of Australian coal. Chinese steel mills and power plants have reportedly been told to stop using Australian coking and thermal coal. The Minister confirmed there has been some disruptions of shipments but no evidence yet of an import ban. PM Morrison and Treasurer Frydenberg are facing increased pressure from export industries and business leaders to soften their stance on China.

US President Trump fuelled hopes for fresh fiscal support telling Congress to “go big” and to get a deal done. Republicans then put forward a larger package which the Democrats turned down. This saw Democrat Speaker Nancy Pelosi come under attack from within her own party and supporter base. US households and businesses desperately need a deal to get done. Politicians playing with people’s lives and livelihoods doesn’t go down well leading into an election. More than 10 million Americans remain out of work. Either they full open the economy or they provide the stimulus.

Virus cases continued to fall in Victoria, but Premier Dan Andrews and CHO Brett Sutton continued to power ahead with Stage 4 restrictions. The problem this time around is that NSW has Stage 2 restrictions with more daily cases. Politicisation of the virus here along with still insufficient contact tracing in Victoria. State borders remain shut, but will hopefully open over the next couple of weeks.

Virus cases continued to increase throughout Europe with leaders potentially reneging on their promises not to lockdown again. France locked down 9 cities whilst the UK was heading towards Tier 3 restrictions. Interestingly, the Mayor of Manchester made it clear they won’t be following any increase to current restrictions, prioritising the livelihoods of their citizens over rising virus cases.

In vaccine news, Johnson & Johnson halted their clinical trial of its vaccine after a participant fell ill. The US FDA has increased safety measures thus extending the timeline for approval. This means we may not get an approval before the US election. Another report cited that the US will have a widely available vaccine by April 2021.

Big Tech came under political pressure this week, drawing the ire of both the Europeans and the Americans. The European Union wants big tech to come under increased regulation to stop them abusing their market power, with new rules to force tech companies to share data with rivals and force them to be more transparent on how they gather information. Across the Atlantic, Twitter and Facebook bordered on interfering in the US election by censoring a New York Post article releasing details of potential Biden family impropriety. Those that shared the article or commented on it saw themselves locked out of Twitter.

British PM Boris Johnson heeded his threat to walk away from negotiations over the future relationship between the UK and the EU on the 15th October, a deadline he had previously set. There remains little sign of an agreement at this stage.

General Advice Warning
The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer
All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

Monster budget propels Aussie market higher

MARKETS

Local and global stock markets rose strongly this week, getting a boost from President Trump’s swift recovery from the virus and a potential increase in household stimulus, whilst local stocks got a boost from the Federal Budget.

US Tech stocks came under some pressure as a US Hose committee report laid out damning details of the many anticompetitive practices of the tech giants. The report offered some ideas for controlling them including potential breakups. This action would be more likely in a Democrat / Biden led Senate, even though President Trump has previously threatened to remove some of the special privileges these tech companies have.

In local stock news, Morgan Stanley analysts are expecting the big 4 major banks to record total impairment charges of $2.5 billion in the September quarter. The low number relative to the significant economic contraction can be explained by a combination of JobKeeper, loan repayment holidays, and temporary amendments to insolvency laws. The status of loan repayment deferrals will be key ahead.

The big 4 banks rose strongly this week getting a significant boost from investor sentiment which rose strongly on the back of the Federal Budget. Investors took some comfort that income tax cuts and business incentives will help reduce household and business stress thus shortening or reducing any bad debt cycle ahead.

CSL said subsidiary Seqirus has finalised a deal with the federal government for a possible virus vaccine from the University of Queensland. However, the timeline on this appears well behind the 6 vaccine candidates globally that are in phase 3 trials now.

Oil prices rose strongly this week after OPEC sent a strong signal that the worst was behind the oil industry and that they expect a strong recovery demand in the 4th quarter.

ECONOMIC

Treasurer Josh Frydenberg handed down the delayed 2020-21 Federal Budget announcing an expected deficit of more than $200 billion and cumulative deficits of almost $500 billion out to 2024-25, in what was the biggest budget since World War II. Significant stimulus in all the right places including income tax cuts to help support consumption and business tax incentives to support business growth and employment, plus manufacturing support and accelerated infrastructure spending. Plenty of assumptions baked into the budget which means more stimulus may be needed.

The RBA kept the cash rate on hold at 0.25% as expected in light of the Federal Budget being handed down on the same day. Expectations are firming that the RBA will announce additional measures at the November meeting including potential small rate cut (unlikely) and further expansion of its balance sheet (i.e. bond buying).

The National Australia Bank monthly business survey showed business conditions rose by a further six points in September. Conditions are now back around the levels seen earlier this year, but remain well below long term averages.

Australian car sales fell sharply in September with demand for new vehicles falling by almost 22% versus the same time last year. To be expected given household employment and income uncertainty ahead.

The Australian trade balance recorded another surplus of $2.6 billion in August, down from $4.7 billion in July and smaller than we’ve seen in recent years. Exports fell 4.2% whilst imports rose 2%. There were large falls in exports of non-monetary (i.e. central bank) gold and exports of services, whilst imports of consumption and intermediate goods rose strongly.

State Street’s global investor confidence index fell in September, with the largest falls coming from Europe and Asia, whilst North America investor confidence rose slightly.

POLITICS

US President Trump recovered swiftly from Covid-19, helped by a range of readily available drug treatments that have been used globally for decades, returning to the White House to continue the election campaign.

US President Trump announced via Twitter that he had called off all negotiations regarding the next US stimulus bill and that any decision will be delayed until after the elections, as both Democrats and Republicans remained too far apart. They actually got pretty close on the dollar value of stimulus, but the Democrat proposal included way too much non-Covid related spending like bailing out the states and repair bills for looting and rioting. He later proposed that he would be willing to sign very specific executive orders to make payments directly to households and provide support to the airline industry.

Prime Minister Scott Morrison announced changes to his front bench following Finance Minister Mathias Cormann’s decision earlier in the year to retire from politics. Simon Birmingham, Minister for Trade, Tourism, and Investment will take on the added responsibilities of Finance Minister and become leader of the Senate, whilst Employment Minister Michaelia Cash will become deputy leader of the Senate. The Prime Minister further announced he will nominate Cormann as its candidate for the secretary general of the OECD.

Australian state borders remain shut and heavily politicised. The Qld premier has vowed to open the border with NSW 1 day after the upcoming Qld election. Victoria remains in stage 4 lockdown whilst reporting less daily cases than NSW. Rumour has it that the WA Premier intends to keep his border shut until April 2021. Australian borders are lines on a map, nothing else. The quicker premiers realise this the quicker the Australian economy can recover.

The 2nd virus wave globally is resulting in increased restrictions across Europe and the US as leaders attempt to bring down daily infection rates. New York will shut schools and businesses in nine neighbourhoods, the French are shutting bars and other restrictions in the Paris region, whilst UK Prime Minister Boris Johnson came under increasing pressure as the country’s test and trace system failed to capture 15,000 positive tests last week. Pleasingly, daily death rates remain largely under control in light of widely used treatments and better testing and tracing.

Aussie dollar takes a dive as risks rise

Markets

A mixed and topsy-turvy week for equity markets with Aussie and US markets trading sideways whilst European and Asian markets fell. Investors continued to take profits whilst concerns also rose regarding the US election and rising virus infection rates.

In local stock news, Harvey Norman shares rose after the company reported a more than 30% increase in sales in the last 3 months versus the same period last year.

Westpac will pay the biggest fine in Australian corporate history, $1.3 billion, for its 23 million breaches of anti-money laundering and counter-terrorism financing legislation. The fine is $404 million more than the bank had provisioned for.

The Aussie dollar fell against the US dollar this week giving up its strong gains over the last few months. Cyclical and more riskier currencies like the Aussie dollar fell against a backdrop of weakening global economic momentum and signs of increased tension between the US and China.

Economic

Australian Bureau of Statistics data showed that payrolls fell by 0.7% over the 4 weeks to 5^thSeptember, in contrast to their labour force survey which showed a strong lift in jobs in August. Key differences between the 2 data series. WA saw the strongest recovery whilst VIC had data still worsening. Clear winners and losers on an industry basis. Payroll jobs remain 4.5% lower than in mid-March – 8.3% lower in VIC and 3.1% lower in the rest of Australia.

With the tapering of JobKeeper and JobSeeker from September 28, the number of workers eligible to receive JobKeeper from their employer could plunge from 3.5 million to 1.4 million workers. For those still eligible, JobKeeper drops from $1,500 a fortnight to $1,200 ($750 for those working 20 hours or less), whilst JobSeeker payments will reduce from $1,115 to $815 a fortnight.

Federal Treasurer Josh Frydenberg has announced new bankruptcy laws, modelled on the American Chapter 11 code, which will allow firms to trade while insolvent if they owe less than $1 million to creditors. No coincidence in the timing, given JobKeeper and JobSeeker are being wound back. Treasury modelling showed the new rules would cover about 76% of insolvent businesses, with 98% of those having less than 20 staff.

The Commonwealth Bank has upwardly revised their profile for Australian economic growth, based on a significant upgrade in the 3^rd quarter where they expect a 2% expansion. That would mean an economic contraction of 3.3% over the full year versus an expected contraction of 4.3% previously. They also expect growth of 2.5% in 2021 with unemployment at 6.5% by the end of 2021.

Speculation is rising that the RBA may have to lower the cash rate further with the interest rate futures market implying a cash rate of 0.1% by the end of the year versus the current rate of 0.25%.

Deputy RBA governor Debelle indicated in a key speech that the central bank had 4 policy options should the economy need a further boost. These included extending its bond buying program, currency intervention, negative interest rates, and lowering the current structure of interest rates in the economy in terms of government bond yields and the borrowing rate the RBA offers to banks.

The preliminary estimate of Australian retail trade showed a fall of 4.2% in August, following a rise of 3.2% in July. VIC led the fall with retail trade down more than 12% in the month. The falls in August were led by household goods retailing, which remains 20% above last years’ levels. Key here will be the 1^st tapering of JobKeeper and JobSeeker next week.

The US central bank is considering extending constraints on dividend payments and share buybacks it imposed on the biggest US banks, which are due to lapse at the end of the 3^rd quarter. The move would disappoint bank investors. The European central bank ban on bank dividends runs through until December.

US labour market data showed that while fewer people made new claims for unemployment benefits, the number remained very high.

Data showed that Eurozone consumer confidence rose slightly in September, whilst other data showed an upgraded forecast for German economic growth this year.

Politics

Covid-19 cases continued to rise as many countries begin to experience their “2^nd wave” including parts of Europe and Asia, with some considering increased restrictions. Pleasingly, we’re not seeing a corresponding rise in deaths. More testing, better tracing, better healthcare preparedness, and use of drug treatments all helping. Virus cases in Victoria have been falling whilst also falling in other parts of the country. On the vaccine front, Moderna and Pfizer disclosed detailed information about their late-stage trials, whilst Johnson & Johnson indicated they would have a vaccine soon.

UK/EU trade talks appear to be improving following the UK government’s tantrum last week. Both sides indicated recent talks were useful and that they’re convinced there’s a deal to be made.

US President Trump has extended his concerns regarding Chinese tech companies and their data security protocols, querying some of the biggest gaming companies in the world including Tencent. He further inflamed US-China tensions in his speech to the United Nations General Assembly where he directly called out the Chinese for spreading the virus.

US politics continued its toxic run with the death of a Supreme Court justice riling tensions as to the timing of a replacement, with the Democrats threatening to launch new impeachment proceedings against President Trump if he proceeds with a nomination. Under the law, he has every right to, and has the votes in the Senate. This coincided with increased violence by protestors after a Louisville grand jury correctly refused to charge 3 police officers with any serious charges resulting from a police shooting.

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Equity markets slide as virus cases rise

Aussie shares rise on expected RBA stimulus

Monster budget propels Aussie market higher

Aussie dollar takes a dive as risks rise

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Equity markets slide as virus cases rise

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