- Australia faces continued external economic risks, with domestic growth slowing as housing, retail and commodity markets come off the boil. The Australian dollar has reduced to 0.6823 against the US dollar, strengthening about 1 US cent over the past week. The Reserve Bank of Australia held the cash rate at 1.00%, at its meeting on 6 August below the 1.6% inflation rate, despite a weaker Gross Domestic Product [GDP] reading in the June quarter of 0.5% or 1.4% for the past year, seasonally adjusted.
- Positively, Australia’s unemployment rate has remained steady at 5.3%, an important measure to ensure Australian households can continue to service high household debt levels.
- Globally negative-yielding Bonds are valued at approximately US$17 trillion when adjusted for inflation, investors are paying governments for the right to hold government debt. This is effectively a soft default by governments.
- The concern in regard to negatively yielding debt is that the purchase of these bonds by the market was done quite suddenly, this potentially an indicator that those managing trillions of dollars [mostly associated with banks and large pension funds] were acting on some type of proprietary information. If this is the case the information was sufficient to accept a certain loss for a high probability of receiving money back, or was an extremely large gamble that bond demand and possibly central bank buying would push bond yields even lower, this would effectively be a high risk bet that the global economy will slow further necessitating more aggressive actions by central banks around the world. There are some methods to potentially profit from negatively yielding bonds in the Over the Counter derivatives market though this can involve considerable counterparty risk. Using Occam’s razor the most likely explanation is that a large number of very large money managers expect the global economic outlook to deteriorate.
- The Australian market is anticipating further cuts to the Cash rate [currently 1.00%], possibly to 0.50% in 2020.
- There are currently efforts by the Australian government to ban the use of cash for transactions above $10,000. While this is said to be necessary to reduce the black economy, it has also been suggested by the International Monetary Fund [IMF] as necessary to lock people into the banking system should interest rates need to be pushed further into the negative. Thus there is some speculation the Australian government is positioning for a possible eventual move to negative interest rates in Australia.
- These concerns on a global scale are helping support the gold price [US$1515/oz.] and silver price [US$18.27/oz.]. Nickel prices have remained strong following the Indonesian nickel export ban [US$17,743.00/tonne].
- Iron Ore prices saw the largest two monthly drop in eight years, with Platts advising that lump iron ore premiums reduced 74% on trade tensions and tight steel margins. Iron ore 62% fines main Chinese port fell below US$100 per tonne.
The Australian 10-year bond yield dipped to 1.094%, slightly higher than last month as the RBA held interest rates in place. The 2-year yield is 0.85% and the 5-year yield is 0.82%.
- The US 10-year bond yield is at 1.67% slightly higher than this time last month at 1.64%, with the market seeing a 68% chance of a quarter-point rate cut at the Federal Open Market Committee meeting 17/18 September. Rates were cut for the first time in 11 years in July. The current Federal Funds rate is 2.0% -2.25%.
- The US 10-year yield is 1.57%, with the 2-year yield at 2.88% meaning between the yield curve is still inverted, a potential recessionary indicator for 2020. The 30-year US bond yield is 2.03%.
- The US Consumer Price Index, the year-on-year inflation rate is 1.8%. Meaning longer dated yielding bonds are hardly offering returns above inflation, unless yields are pushed further into the negative [as bond yields decline bond prices rise].
- US 2nd Quarter company earnings are expected to end down 2.8%, adding to stock market volatility.
- The European Central Bank [ECB] is expected to boost stimulus efforts at its meeting 12 September, with the central bank looking at options for further stimulus measures. The ECB is widely expected to recommence Bond buying in September. The German 10-year bond yield is -0.64%. Euro-zone GDP growth in the second quarter was 0.2%.
- Trade negotiations between the US and China continue, with further meetings between the two sides expected in October.
- China’s exports contracted 1% over the previous year in August, with imports contracting 5.6%. The Chinese Central Bank advised it will cut the amount of funds that must be held by banks in order to inject liquidity into the economy.
- China’s GDP growth is expected to decline to 5.7% in 2020, in the second quarter of this year Chinese GDP growth was 6.2%.
- The ASX200 Index lifted 2.15% over the last 30 trading days. ASX200 is shown below.
- The five best and worst percentage stock performers on the ASX200 over the last 30 trading days were WESTERN AREAS LTD ORDINARY [WSA] 38.73%, AFTERPAY TOUCH ORDINARY [APT] 32.91%, NANOSONICS LIMITED ORDINARY [NAN] 30.56%, SMARTGRP CORPORATION ORDINARY [SIQ] 27.14%, and BEACH ENERGY LIMITED ORDINARY [BPT] 25.12%.
- The poorest performing stocks were SARACEN MINERAL ORDINARY [SAR] -20.71%, OOH!MEDIA LIMITED ORDINARY [OML] -30.02%, CYBG PLC CDI 1:1FOREXEMPT LSE [CYB] -30.48%, PILBARA MIN LTD ORDINARY [PLS] -30.52% and
- SPEEDCAST INT LTD ORDINARY [SDA]-30.66%.
The five best and worst percentage performing sectors in the ASX 200 over the last 30 trading days were HEALTH CARE [XHJ] 4.86%, INFO TECHNOLOGY [XIJ] 3.36%, CONSUMER STAPLES [XSJ] 2.93%, GOLD [XGD] 1.68%, and INVERSE DAILY INDEX [XIN] 0.99%. The poorest performing sectors were DIV OPPORTUNITIES [XDI] -4.32%, UTILITIES [XUJ] -5.34%, S&P/ASX 200 RES [XJR] -6.26%, MATERIALS [XMJ] -6.59%, and METALS AND MINING [XMM] -6.79%.
- The broad global equities index (MSCI ACWI) delivered a -2.397% return in August and 8.75% for 2019. The US S&P500 fell nearly 2.00% in August, and is up approximately 21% year to date, the STOXX Europe 600 Index was up 4.19% over the past month, and up 14.66% year to date. The Shanghai stock index was up 8.10% over the past month and up 20.28% year to date.
- There are continued signs of a slowing in global growth, with central banks positioned for increased economic stimulus in the coming months.
- Large positioning into negatively yielding bonds suggests investors are already positioning for a slowdown and increased central bank stimulatory actions. It is also possible that this positioning is due to an as yet to be clarified break in the functioning of the financial system, however, this remains to be seen.
- It is important to remember with the market to the tune of US$17 trillion positioned for further declines in bond yield, should bond yields actually rise, this would create massive loss-making positions for these investors.
- We expect a further cut in Australian and US interest rates in 2020, and for the global economy to remain lacklustre. We expect stock markets to remain volatile and short term in focus. There are considerable external risks evident for the Australian economy and we maintain our conservative positioning recommendation.