03-09-19
From George Lucas, Raiz CEO
Nervous truce in US, China trade war sees equity markets up
Firstly, looking at equities, the S&P500 closed last week back near the top of its recent range, with key resistance up near the 2,945 level and the index still within 5 per cent of its all-time high.
This suggests that — taking a step back from market volatility and US President Donald Trump’s recent trade war tweets — that many investors are still not overly worried about the outlook.
One possible explanation for the comparatively limited reaction in equity markets is that investors are still clinging to hopes that the trade war will blow over. However, this position doesn’t look particularly credible anymore given both China and the US have recently doubled down on their positions. An escalation in the trade stoush seems a much more likely outcome.
The second theory is that there are continued hopes among investors that the global economy will be fine, despite the trade war. Admittedly, its direct effects on the rest of the world are likely to be relatively small, but its indirect impact via confidence and investment remains unclear.
The problem with both these analyses is they miss the bigger picture in that the global economy has already lost momentum for reasons not directly related to US-China trade. Data out of Germany this week showing its economy contracting on weaker exports in Q2 is a stark reminder of this.
Powell uses Jackson Hole to hint at Fed rate cut
Global growth will probably remain weak even with some further easing of monetary policy by the US Federal Reserve later this year. Indeed, Federal Reserve Chairman Jerome Powell’s much-anticipated speech at the Jackson Hole conference hinted that the Fed will cut interest rates at its September meeting, but did little to clarify intentions beyond that.
As it stands, investors expect a further 100 basis points of cuts over the next 12 months, but those projections are almost certain to be revised down at the September meeting. It’s not only investors who have been disappointed by the Fed’s gradual approach, with President Trump repeatedly — and increasingly stridently — calling for much looser monetary policy.
It’s likely that the Fed will cut twice more this year largely on fears financial conditions could tighten if it disappoints market expectations. In saying that, the Fed has never cut by more than 75 basis points in a year outside an actual recession and the US is not currently in a recession.
Trump hints at support for more tax cuts
Trump — because he is not getting his rate cuts — is now said to be considering further tax cuts. But even if he keeps pushing for them, there’s good reason to think won’t happen. Remember, Democrats control the House of Representatives and won’t want to help Trump in an election year, while Republicans may also balk at increasing US fiscal debt that’s already near 5 per cent of GDP.
Australian construction work slumps
At home, the slowdown in Australia’s construction industries has ramped up, with new data showing a sharp decline in building work done in Q2. This suggests private investment fell further in the three months to June and lifts the downside risks to GDP growth.
Still on the construction sector, it’s unlikely that rebounding machinery and equipment investment in Australia will be enough to offset the current slump in construction activity. However, Australian firms have revised up their forecasts for future capital expenditure, so the drag from falling investment may ease gradually over the coming quarters.
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