The Big Picture
The big market rallies that started with Trump’s November election didn’t lose steam in March. But it took the first leg of the French presidential election to get us across the line in late April.
People were naturally worried that France could vote in a “Frexit” president. In round one, Macron and Le Pen made it to contest round two while side-lining the major parties. Macron is very much favoured so that, in a two horse race, he has an excellent (but not certain) chance of becoming president.
Markets surged on the news as they see Macron as steering a steady ship. The days of people expecting a rapidly disintegrating European Union are almost gone.
France is not without its problems. Its economic growth slipped to an unimpressive +0.3% in quarter 1 (Q1). Elsewhere in Europe, Greece celebrated its seventh anniversary of its debt bailout. The IMF (International Monetary Fund) now claims it was stretched by the size of the 2010 bailout.
In April the IMF increased its 2017 growth forecasts: for the UK to 2.0%; and the world to 3.0% from its previous 2.6% forecast. The IMF is not known for its positivity so these forecasts are indeed welcome signs of continued economic life.
The UK is doing quite well in every context. Its PM, Theresa May, called a snap election for June 8th to ensure that there would be ample time for the Brexit negotiations to be completed and digested before the next election. Had she not gone early, there would have been less than a year after the completion of Brexit – as it is expected to pan out. Of course, it helps that the opposition party is in complete disarray at the moment.The US produced mixed results. On an economic front, the results were not great. Employment (nonfarm payrolls) came in at about half of what was expected. However, unemployment came in very low at 4.5%.
US growth came in at +0.7% for Q1 (annualised), the slowest since the GFC. But warm weather arguably affected clothing and heating oil sales. One number is not a problem.
Housing in the US was another story. New home sales and house prices both surged over 5% for the month compared to the same month last year.
On a positive front, Trump announced his tax plan which involves big cuts and simplifications. It didn’t excite markets for two reasons; firstly, it was much as expected; and Secondly, he didn’t announce how he would pay for the cuts.
The biggest surprise of the month came from Australian jobs formation. A massive 75,000 jobs were supposedly created after a year (2016) when full-time jobs actually fell. Unemployment is stuck at 5.9% which is not good by normal standards.
The RBA (Reserve Bank of Australia) does not look like cutting rate. But J.P. Morgan and Macquarie predict two cuts – and we agree that we need these two predicted cuts in 2017. To top that, Scott Morrison at last looks like doing something sensible.
Morrison wants the May Budget to reflect the difference in “good” and “bad” debt. The personal equivalent is an affordable mortgage for your home is good but a loan for a holiday is bad. Does the debt generate something lasting and useful?
This distinction would allow the government to produce a fiscal stimulus without losing sensible management of bad (or recurrent) debt. Game on!
And while all of this has been going on, the VIX fear index and other market volatility measures have been well below average. The ‘old normal’ we have been waiting for since 2007 is here.
The ASX 200 had a decent April, up +1.2% to follow a wonderful March of 3.3% – both including dividends. Volatility was particularly low so the market is grinding up slowly. The way we like it!
The big dividend-paying stocks behaved at extremes. Financials stocks – like the big banks – powered ahead at +1.9%, Property at +2.2% and Utilities at +3.1% at one extreme while Telcos were savaged at 9.9%!
There are all sorts of problems going on in the Telco space that makes it unattractive at the moment. The big banks have limited growth prospects but their dividends look sustainable.
With, in our opinion, no property price bubble waiting to burst – risks in banking appear to be ‘as normal’.
Wall Street and the German DAX were up about the same as the ASX 200 in April. The London FTSE was down 1.6% on the month but that follows a string of quite good months.
The VIX ‘fear’ index (which is considered by many to be a proxy for investors taking out insurance on downside risk in stock markets) has been consistently low for some time. Even as Trump lobbed missiles into Syria, and North Korea tried to lob theirs further than the launch pad, the fear index was contained. This rally is one that investors are comfortable with.
Bonds and Interest Rates
The RBA did not change rates in April and looks very unlikely to do so in May. J.P. Morgan reiterated its prediction for two cuts for 2017. We agree that the cuts are necessary but the inflation and employment data posted in April might give the RBA a false signal that things are OK here.
Federal Reserve (Fed) did not alter rates but it did state that it seems the right time to start running down the $4.5 trillion debt built up during the GFC. It is likely that they will just let some short term debt mature without buying more to cancel out maturation as they have been doing. It looks like this process will take a very long time to complete.
Other Assets Iron ore prices fell further – by 17% in April. However, the current price is reasonable for our miners and our export data.
Oil prices slipped about 2% and our dollar matched that fall.
Australia The unemployment rate stayed at 5.9% for March and retail sales fell by 0.1%. These are poor data.
In the last couple of years our labour market has been subdued. So the March creation of 75,000 new jobs stands out as an anomaly. These data do have a wide margin of error, coming as they do from small sample surveys. We do not see this number as heralding a new surge in continued job creation.
Inflation jumped up to 2.1% making it lie in the comfort zone of the RBA at 2% – 3%. However, there were extremely big increases in petrol and electricity prices that seem unlikely to be repeated.
We see both inflation and jobs as giving false hope. However, Australia is far from being in dire straits. But someone needs to do something.
The Treasurer has the opportunity to do something useful in the May budget. It looks like he is positioning himself to deliver an infrastructure investment package. That would be great but, given the opposition and cross-benchers, getting bills passed is another matter.
China continues to produce strong economic statistics. But what we need from China now is some form of co-ordinated effort to keep North Korea in check.
The jobs data unexpectedly fell to only 98,000 new jobs from around the 180,000 expected. But unemployment at 4.5% is really quite low meaning that less new jobs are needed compared to when unemployment was recently in double digits.
That GDP growth also came in low, which makes it less likely that the Fed will hike again soon. We think there will be at most one more hike this year – say around August.
US Consumer Confidence fell to 124 – which is a very high number in itself. The previous number was a 16-year high! Americans are happy.
The French voted as expected for the first round of the presidency election. It seems like Macron will win round two against the left leaning anti-Euro Le Pen.
The problems in Europe continue to recede.
Rest of the World
North Korea launched a couple of missiles that fortunately exploded before they left the test site. The US seems ready and able to deal with North Korea if it continues its belligerent attitude.
On the other hand, the US successfully lobbed 59 missiles from ships in the Mediterranean at Syria. While all forms of warfare have unintended consequences, it does seem that this display of strength not only helps control the terrorist group, ISIS, but also is a demonstration to North Korea of what the US can do.
The US also dropped the largest ever non-nuclear bomb on a remote part of Afghanistan. This too seems to be more of a demonstration of strength to North Korea than an end in itself.