Weekly Market Update – 4th September 2015

• While most share markets managed to remain above recent lows they had a volatile week, falling back again thanks largely to ongoing worries about Chinese economic growth and the Fed, with indications from the ECB that it is prepared to ease further if needed – “the Draghi put” – providing only partial support. Over the week US shares lost 3.4%, Eurozone shares fell 2.9%, Japanese shares fell 7%, Chinese shares fell 2.2% and the Australian share market lost 4.2%. Commodity prices were mixed, with oil up but metals down and the combination of global worries and poor Australian growth saw the $A fall to just above $US0.69 for the first time since 2009. Bond yields declined as deflation fears and safe haven demand persisted.

• The much anticipated August US jobs report keeps the prospect of a September Fed rate hike on the table, but doesn’t settle the debate. Payrolls rose a less than expected 173,000, but against this the previous months were revised up and unemployment fell to 5.1%. Wages growth edged up but remains very low at 2.2% year on year. Taken on its own, the jobs report would support a Fed rate hike this month, but it’s not strong enough to offset the downside threats to US growth and inflation coming from global uncertainties, including the risks to Chinese growth, weak commodity prices and now the prospect of more ECB easing putting more upwards pressure on the value of the $US. As a result, the US bond market’s implied probability of a September hike of around 30-35% sounds about right. It would also seem unlikely for the Fed to want to hike at this point with the markets seemingly unprepared for it, given the uncertainties around the outlook.

• Our assessment remains that the next few months are likely to remain rough for shares as September and October are often tough months and the worries about China and the Fed are likely to linger for a while. As a result, it’s still too early to be confident we have seen the low.

• Beyond the uncertain near term environment we expect to see the usual December quarter seasonal strength helped along by much improved valuations, increasing confidence that China has got its growth under control and investors getting more comfortable that the Fed is not going to do anything to upset US/global economic growth.

• One thing that will ultimately help the Australian economy and share market is the continuing plunge in the value of the Australian dollar. When it comes to currency forecasting J.K Galbraith’s observation that “there are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know” is particularly pertinent. So I have to be humble and admit that I don’t have a clue how low the $A will ultimately go. But my analysis indicates that – in the context of commodities being in a long-term downtrend, the Australian economy struggling and the interest rate gap in favour of Australia likely to narrow further – the $A has a lot more downside. Having broken below $US0.70, the $A is expected to fall to $US0.60, and possibly fall even further.

• The plunging $A which is now down 37% against the $US since its 2011 high – is certainly bad news if you are planning an overseas holiday or if you do a lot of purchases online at offshore websites, but that’s the point. Its forcing Australian’s to think about holidaying more in Australia, it’s helping drive a return in foreign tourists and foreign students to our universities and its turning Australians off their love affair with shopping overseas which is good for our retailers. Manufacturers who survived the high $A years will likely now survive and hopefully prosper and farmers and miners will get a benefit when their $US earnings are translated back into Australian dollars. And at the same time it’s not exactly causing a surge in imported inflation. So on balance a lower $A is just what Australia needs right now to help rebalance the economy in the face of the mining downturn.

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