By TWD Invest

July 22, 2019 | News

June 2019 in Review

Economic Developments


  • Following the surprise win for the Liberal Party/ Coalition in the Australian Federal Election house auction clearance rates improved in Sydney (71.29%) and Melbourne (67.16%). This has boosted sentiment in the housing sector, however, whilst the market did stabilise as anticipated post-election, there is a possibility of another step down in the Australian housing sector as housing loan approvals decline and under employment remains a drag on the economy.


  • The Reserve Bank of Australia (RBA) cut interest rates 0.25% to an historic low of 1.0% on 2 July, its first back-to-back rate cut since the European bank crisis in 2012. The RBA advised, “Over the year to the March quarter, the Australian economy grew at a below-trend 1.8%. Consumption growth has been subdued, weighed down by a protracted period of low income growth and declining housing prices.”
  • The market is anticipating further interest rate cuts possibly to 0.50% in 2020, with some speculation that the RBA may ultimately by forced into quantitative easing (QE). This has seen the Australian dollar trade lower to $0.70 against the US Dollar and has been supportive for the ASX stock market.
  • The experience in Europe with ultra-low or negative interest rates was that it acted to lift house prices, the experience with QE in the US was that it acted to lift stock prices. Anticipation of lower interest rates in the US and Australia is a key reason for the current strength in the ASX market.

Bond Markets: Australian Bond Yields decline on rate cut.

  • Yields on three-year Bonds are under the RBA’s 1.00% cash rate at 0.995%. The Australian 10-year bond rate recently moved to a yield of 1.45% on the back of the latest RBA rate cut.
  • The US Government Bond 3-month/10-year spread has been inverted for nearly seven weeks. In approximately the last 50 years, an inverted yield curve has proceeded a recession, that has occurred between 3 months and 27 months post the start of the yield inversion. There was one false positive in 1965, after the spread inverted for approximately three days, and a recession did not subsequently occur.
  • A Bond yield inversion is when short dated yields are below long dated yields, signalling the market anticipates lower interest rates in future due to weaker economic growth.

Global Markets & Economics

  • Australia’s household debt to household income ratio is currently 190% with interest rates already at record lows, a more normal historic ratio is approximately 65%. This suggests that the Australian economy is vulnerable to a domestic or external shock. If this was to occur it would be clear that the RBA made a fundamental error by not lifting interest rates as the household debt to income ratio rose above 65%, and in not doing so, creating a housing bubble.
  • In its recent quarterly forecasts, the EU’s executive arm trimmed its 2020 euro-area GDP projection to 1.4% from 1.5% amid what it said were increased downside economic risks. Inflation, in 2019 and 2020 was lowered to 1.3%. This opens the way for further stimulus from the European Central Bank (ECB).The ECB is widely expected to recommence Bond buying in September approximately 9 months after it capped the purchase program at 2.6 trillion Euros.
  • Deutsche Bank announced 18,000 job cuts around the globe by 2022. The bank’s share price is trading at 6.74 Euros after trading above 30 Euros in 2016. While much is spoken of the bank’s need to restructure not enough is perhaps written about the bank’s ~ US$40 trillion notional OTC derivatives business. Notional values move closer to value at risk in the event of default. To place this in perspective global GDP is approximately US$80 trillion.
  • Trade negotiations between the US and China are ongoing and continue to drag on, adding to concerns that the dispute is slowing business decision making and economic growth. The US lifted tariffs to 25% from 10% on US$200 billion of Chinese goods in May, and China raised duties on US$60 billion in US goods in retaliation.
  • The Caixin ChinaGeneral Manufacturing PMI fell to 49.4 in June 2019 from 50.2 in the previous month. Chinese 2nd quarter GDP is expected to slow to 6.2% with the government recently making efforts to relax monetary policy injecting increased funds into the banking system. China’s economy grew at 6.2% in the second quarter, the slowest pace in 27 years as trade negotiations between China and the US continued to pressure the economy.
  • The next US Federal Open Market Committee meeting is scheduled for July 30-31. The US Federal Funds Rate is currently 5%. Federal Reserve officials in the June meeting minutes saw the case for easier monetary policy gain momentum. “Participants generally agreed that downside risks to the outlook for economic activity had risen materially since their May meeting, particularly those associated with ongoing trade negotiations and slowing economic growth abroad”. Futures currently show a 100% probability of a rate cut at the July meeting.
  • US 2nd Quarter company earnings are expected to see overall earnings reduce 2.3%. Despite this, the Dow Jones Index hit record highs over the past week.

Market Movements

Australian Equities:

  • The ASX200 Index lifted 8.3% over the last 200 trading days. ASX200 shown below.
  • The top five best percentage performers on the ASX200 over the last 200 trading days were Fortescue Metals Group [FMG] 140.0%, Appen Ltd [APX] 125.0%, Magellan Financial [MFG] 105.2%, Saracen Mineral [SAR] 98.4% and IDP Education [IEL] 86.8%.  Australia Mines Ltd [AUZ] -59.2%, Mayne Pharma [MYX] -58.2%, Seven West Media [SWM] -56.3%, Syrah Resources [SYR] -56.1% and Speedcast Ltd [SDA] -51.2% were the worst performers over the period.
  • The best and worst percentage performing sectors in the ASX 200 over the last 200 trading days were Metals and Mining 23.3% and Materials 18.3%. The poorest performing sectors were Consumer Discretionary 3.0% and Energy -9.6%.

ASX200 Index:

Global Equities:

  • The broad global equities index (MSCI ACWI) delivered a 5.1% return in June and 14.4% for the first half of 2019.  The US S&P 500 lifted 19.4% so far in 2019 and moved up 6.9% in June, the STOXX Europe 600 Index is up 14.6% to date in 2019 and 2.1% over the past month. Shanghai stock index is up 17.5% to date in 2019 and up 1.7% in the past month.

Looking Ahead

  • The inverted yield curve in the US and high household debt in Australia adds economic and market risks, which we will be watching closely. TWD Invest is also monitoring the trade discussion outcomes between China and the US.
  • July sees the US company reporting season, followed by Australian reporting season in August. We will be monitoring both the US and Australian market reaction to company earnings announcements and how they compare to market expectations.

Words by TWD Invest .