Market climbs wall of worry

Instreet Market & Economic Commentary & Opinion

Popular opinion may be on a downer, but equity markets continue to rise with the US, Germany and the UK all reaching record highs last week. Even Japan closed out above 20,000, which hasn’t been seen since Dec 2015.

It may be an unloved rally but we believe the market will continue to climb the wall with no major draw down on the horizon.

Take Australia where sentiment amongst retail investors is low. There is a lot of negative news about the banks off the back of the bank levy, as well as concern for the resources sector in light of additional taxes on major miners such as BHP and RIO. But when retail investors are negative, it’s usually a sign that the market is about to turn and begin to rally.

In the US, there is constant discussion about whether the market is overvalued. Yet companies like Apple, Alphabet and Amazon (which broke through $1000 a share last week) continue to rally.

Of course, hanging over all this is the possibility of slowing world growth associated with China. There is fear that decelerating growth in China, from 6.9% to below 6.5%, will cause global growth to slow as well. This is one of the main reasons we have seen a decrease in commodity prices like Iron Ore (which has fallen 15% over the last six days and is now lower than October last year).

On the flipside, there are many factors that will support global growth such as:

  • PMI readings have been strong, notably in the Eurozone and the US
  • The US S&P 500 showed 14% year-on-year earnings growth with indicators suggesting this was led by multi-national corporations

US rates

May's mixed US Employment Report, released on Friday afternoon, does not alter the view that the US Federal Reserve (Fed) will raise interest rates this month. This is at odds with some investors who appear to be counting on the Fed keeping policy much looser, even as the economy improves.

The 138,000 gain in non-farm payrolls was less that the 185,000 expected, causing US Treasury yields and the US dollar to slip. This is not all that surprising given the number of people capable of being employed is falling so it’s natural that the headline number will drop off.

The employment rate declined to 4.3% in May – its lowest level since 2001, with survey evidence suggesting it will fall below 4% in the next few months.

Australia economy half full

Despite negative sentiment, it’s fairer to describe the Australian economy as half full rather than half empty. The 1.0% month-on-month leap in retail sales during April was much stronger than expected. And the Q1 private capital expenditure survey showed that mining investment is becoming less of a drag on GDP growth.

While the RBA policy meeting on Tuesday shouldn't surprise anyone by leaving interest rates on hold at 1.5%, there may be surprises when the Australian GDP data is released.

 

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