Pitcher Partners' wrap up of issues impacting the markets over the last week.
News in Review
Minutes from the RBA’s May meeting revealed that risks concerning rising house prices remain a principal concern for the bank. The minutes state that “growth in housing credit had continued to outpace growth in household incomes, which suggested that the risks associated with household balance sheets had been rising.”
Australia's unemployment rate beat market expectations dropping to 5.7% in April due to the creation of more than 37,000 jobs, many of which were part-time. The overall participation rate, which refers to the number of people either employed or actively looking for work, was steady at 64.8%.
The US dollar suffered its worst week in more than a year, wiping out all its gains since Donald Trump was elected president. Investors seem to be fretting that the White House scandal involving the sacking of FBI director James Comey might derail Trump’s election fiscal stimulatory promises.
The U.K’s wage growth continues to lag behind inflation. Earnings rose by 2.1% year-on-year, the weakest increase since July of last year and below economist’s expectations for a 2.2% rise. The unemployment rate in the period between January and March unexpectedly fell to its lowest level in nearly 42 years at 4.6%.
Brazilian President Michel Temer had allegations of corruption made against him (alleged recordings of him discussing hush money for pay-offs), having been appointed with the promise of a cleaner administration. As a result, the Bovespa stock market index fell 8.8%, while the Brazilian real lost over 7% against the USD.
It was revealed that on a yearly basis, the Eurozone's GDP increased by 1.7% in Q1 of 2017, adding to evidence that the bloc's recovery is gaining momentum and is outperforming the United States, which saw its weakest growth pace in three years Q1 of 2017 at a 0.7% annual rate.
China's industrial production missed market expectations in April in another sign that growth momentum in the world's second largest economy is slowing. This comes off the back of a strong Q1 for the Chinese economy, when it reported growth of 6.9%, its highest figures in six quarters.
No investor enjoys seeing a 2% market fall in a couple of days, regardless of how ‘long-term’ they are, but technically the tumble was needed given the strong and stable rise in shares since the election of Trump in November.
Buffet says to be fearful when others are greedy and greedy when others are fearful. The market volatility index, (often labelled a ‘fear index’), reached record lows before last week’s tumble, indicating complacency. However, the market’s jolting yo-yo-like response to what can be labelled as unsurprising news (the distant possibility of Trump’s impeachment) is testament to the high level of investor nervousness.
As markets fell last week, investment volume in ‘panic-based’ investments rose to record levels. ‘Panic-based’ investments are funds which make money as stocks go down or benefit from volatility. To use a poker analogy, the market has showed us its hand. Investors are still fearful. While the time may have passed to be greedy, let us be brave in a market which is still fearful.
The Week Ahead
US: FOMC Minutes, Durable Goods Orders (April), Purchasing Managers Index (May), New Home Sales (April)
ANZ CEO Shayne Elliott admitted that the major banks and the Australian Bankers’ Association have discussed whether they should embark on a campaign to repel the $6 billion bank tax like the one the mining industry successfully waged against the Rudd government.
Infant formula maker Bellamy's made progress in rebuilding its board by electing Hong Kong-based investor John Ho as its new chairman and appointing former Fosters’ boss John Murphy as a director.
Shares in Fairfax Media are trading at six-year highs after the company received a $1.20 per share takeover offer from private equity investor TPG Capital.