Weekly Market Update – 12th June 2015

• Shares had a mixed week with mostly good economic data, but increasing nervousness regarding Greece and worries about a Middle East Respiratory Syndrome (MERS) outbreak in Korea weighing on some Asian markets. While US shares (+0.1%), Australian shares (+0.8%) and Chinese shares (+2.9%) rose, European shares (-0.2%) fell slightly as did Japanese shares and some other Asian markets. Bond yields mostly fell late in the week. Despite stronger US economic data, the US dollar fell slightly and this helped some commodities and the Australian dollar.

• Chinese shares’ inclusion in MSCI benchmark indices on hold but inevitable. While some may have been disappointed by MSCI’s decision not to include China A (or mainland) shares in its benchmark indices the logic was understandable as gaining exposure to Chinese shares for foreign investors is still a bit convoluted. That said it’s just a matter of time as China is steadily making foreign access easier. When it does occur it will boost global demand for Chinese shares from global “benchmark huggers” and more importantly will inject a more significant and much needed foreign institutional element into the Chinese share market helping to balance out speculative retail investors and making for a more stable market.

• Its back – the RBA’s clear easing bias, that is. If there was any doubt that the RBA retains an easing bias it was laid to rest by Governor Steven’s comment that “we remain open to the possibility of further easing” and that “the economy could do with some more demand growth”. Of course there were numerous qualifications around this – in particular the risks around low interest rates – but the clear message is that another rate cut is under serious consideration. It is now more about narrowing the interest rate gap between us and the zero rates in the US, Europe and Japan to make sure the $A continues to come down, helping globally exposed sectors like tourism, higher education, manufacturing and agriculture combine with home construction and consumer spending to help fill the gap left by the end of the mining boom. The $A probably needs to fall into the $US0.60s. Whether there is another cut or not, the Governor pointed out “it will be quite some time before we can think about interest rates going back up” so get used to low rates for a long time yet.

• RBNZ back peddling on rates. It now looks like NZ jumped the gun a bit on rate hikes and is now having to fall back into line by cutting rates as NZ export prices are falling. More RBNZ cuts are likely. So while the $A is likely to head lower over time against the $US, the $A/$NZ rate is on the way back up again.

• Bank of Korea cutting rates too, largely in response to the threat that an outbreak of Middle East Respiratory Syndrome (MERS) is posing to consumer spending there. It seems we regularly have fears of new pandemic lately. Since 2003 there has been fears regarding SARS, bird flu, swine flu, Ebola and now MERs. The latter appears to have originated in Saudi Arabia from camels with the first reported cases in 2012, with cases being reported in over 20 countries with the Korean outbreak being the largest outside of Saudi Arabia. At this stage it’s hard to know how big a threat it is, but fear and the resultant reduction in travel and consumer spending could have a short term effect on economic activity like occurred in some Asian countries with SARS in 2003. But just bear in mind – we have seen all this before with SARS and Ebola last year. The panic around the outbreak could fade just as quickly as it has arisen as authorities swing into action and human behaviour changes.

• Greece nearing the end game. While there have been some positive signs of progress with Angela Merkel saying “where there’s a will there’s a way”, with the IMF leaving Brussels and indicating there are still major differences and EU leaders issuing ultimatums to Greece the ball is now clearly in Greece’s court to accept what is on offer or face the consequences. To avoid defaulting at June end, a deal needs to be agreed to soon so it can pass various country parliaments (which will be another source of uncertainty) in time. The June 18 Eurozone finance ministers’ meeting is the next deadline to watch. The pressure on Greece is now immense as recent turmoil has helped plunge it back into recession, which has hit tax revenue and likely eliminated its primary budget surplus. So even if it were to repudiate all its debts it will still have to undertake aggressive austerity. The problem for PM Tsipras is trying to get support for an agreement which is acceptable to both Greece’s creditors and to the rest of Syriza. Our base case remains that a deal will be agreed but the risks are high. So Greece is likely to remain a source of volatility. But even if Greece does end up leaving the Euro, the threat of contagion to other peripheral countries is low compared to the 2010-12 period as they are now in better shape and the ECB is now providing stronger support.

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