The Big Picture

Our stock market just posted the best month since October 2011! The ASX 200 rose +6.3% in July and we were near the head of the pack of the major world indexes. Since +6.3% is about the average for a year, this turnaround story shows how easy it is to miss out for investors who keep jumping in and out of markets.

But there was no really good news to spark this world-wide rally. Rather, it was the settling of the dust on a number of key issues that had been on the back burner. All the fuss about Brexit turned out to be nothing more than a distraction.

The United States (US) jobs data ended a very poor run for 2016 with a bumper number for June. The US Federal Reserve was at least seen as probably not hiking rates for the remainder of 2016.

But the best bit must have been the China data. GDP growth, Industrial Production and Retail Sales all did quite well – but Bloomberg released its new China index. The China Premier – before he took office – often spoke about how to make China data more transparent. He wanted to focus on things like electricity demand – which is easily measured.

It turns out that the new Bloomberg index does just what the Premier wished for and suggests that the China data agency, if anything, has probably been understating growth in its GDP releases.

If it hadn’t been for the Bastille Day massacre in Nice, this would have been time to pop the corks of some chilled bubbly. And, sadly, Nice wasn’t the only tragedy in July.

Turkey nearly sent markets alight with a mid-month military coup. It started after the market closed in the US on a Friday and was all over in time for Sunday lunch. Markets opened just fine on the Monday.

Of course this does not mean bad news will never recur. But with markets gaining strength, the VIX ‘fear index’ is at a very low level indeed; the US Q2 company reporting season has been quite good and ours starts in a few days.

We have the market fundamentals quite strong and much of the recent rally merely eroded underpricing from undue pessimism. We are now back on track for the forecasts we posted at the start of 2016.

There has been lots of talk about rate changes and stimulus around the world but it seems central banks are moving slowly in measured steps. There is a good chance that the RBA will cut in August – but if it doesn’t, it will probably cut soon. Our unemployment rate of 5.8% is neither good nor bad. It is more a problem, of who would prefer full-time to part-time employment.

Our full-time employment situation stopped deteriorating this month. The next number should tell us whether the May cut by the RBA had some impact.

And, of course, we had a general election with no clear decision. But neither was there daylight in the Brexit vote and it seems close between Trump and Clinton. Perhaps it’s time for a real set of leaders to step into the ring.

Our electoral problems probably contributed to Stand & Poor’s putting our nation – and our big four banks – on negative credit watch. It’s not a big issue if we lose our AAA status. Remember the USA lost its AAA rating a few years ago.

Asset Classes

Australian Equities

No sector on the ASX 200 went backwards in July and we would have had an impressive five-month run had the ‘Brexit month’ of June not turned out to be  2.7%, but folded into the impressive +6.3% for July. We have had +14% growth in the ASX 200 since February.

The banking sector has been holding the market back for some time. Those in search of yield seem to be flocking into Property and Utilities stocks – plus a bit in the low-yield, but highly defensive, Heath-care sector.

Foreign Equities

All of the major world indexes had a great July. The S&P 500 and the Dow recorded several all-time highs on Wall Street.

Wall Street was helped by some good company reports in July. A few of the banks did particularly well and Amazon blasted out of the blocks.

With the S&P 500 at 2,174, Citi’s forecasts for End-of-Year 2016 of 2,150 is already behind the 8-ball – but they are sticking to it!

Bonds and Interest Rates

The RBA was on hold again in July at 1.75%. The market was pricing in a 70% chance of a cut on August 2nd but that probability fell to 55% straight after the low – but on expectations – inflation figure of 1.0% for the year.

The US Fed claims September is a ‘live’ meeting for a possible rate hike. Most analysts are thinking December to June 2017 is far more likely.

European Union debt was downgraded to AA- from AA by Standard & Poor’s.

Japan under-delivered on its expected stimulus package this month.

Other Assets

After a terrible start to the year, iron ore prices recovered to sustainable levels and up +12% in July. Oil prices too recovered but lost over  14% in July.

Oil rigs in Alberta are coming back on line after being closed in the big fires of 2016. That should keep a lid on oil price increases.

Gold (+2.1%) was up on the month.

Regional Analysis

Australia

First quarter inflation came in at a negative rate, so it was with some relief that a modest +1.0% for the year was posted in Q2. Since the RBA ‘target band’ is 2% to 3% ‘over the cycle’, they have a reason to cut rates – particularly since the employment data is stubbornly very ordinary.

China

The chatter about China facing a hard landing has faded into the background. China has room to move but economic growth is strong.

U.S.A

While the jobs data were stellar last month, they are still not enough to soak up the slack for the weak start to 2016. These key data need to be watched particularly as US growth disappointed in Q2.

Analysts were expecting 2.5% (annualised) but got only +1.2%. To make matters worse, Q1 growth was revised downwards from +1.1% to +0.8%.

But the fundamentals of the US economy are not bad. They are just not great.

Europe

The European Union economies continue to be sluggish and the impact of terrorism on prospects is hard to ignore.

People on both sides seem to be handling the Brexit solution well. There is no reason to expect a sudden fracture in their relations.

And if Britain needed a dose of confidence, in one weekend they won two Wimbledon titles (Murray and Watson), the British Grand Prix (Hamilton), and 1-2-3 in the Tour de France (Froome, Yates, Martin). General Classification and Mark Cavendish had already won three stages and wore yellow. Who said a country couldn’t come back from the brink? All they need now is a football team.

Rest of the World

Japan Prime Minister Abe scored a landslide victory in his Upper House. That enabled him to pass through a massive fiscal stimulus package – but the Bank of Japan didn’t do as much as expected on the monetary stimulus side.

Brazil’s economy is in real trouble and Olympic success seems far from being a done deal. Venezuela is putting forced labour to work on farms. While we focus on some parts of the world, South America and Africa – as well as parts of the Middle East – are faring far short of what they would hope for.