Global stock markets remained under pressure over the past week due to continued hawkish comments from the US Federal Reserve (Fed) and European Central Bank (ECB) and lingering recession concerns.
For the week, US stocks fell 3.3%, Eurozone stocks fell 1.4%, Japanese stocks lost 3.5% and Chinese stocks lost 2%. Australian equities remained somewhat more resilient in August (relative to global equities), helped by mostly positive earnings reports, but are now also under pressure, falling 3.9% last week.
Bond yields rose sharply due to higher short-term interest rates for longer. Prices for oil, metals and iron ore fell, with iron ore particularly hit by fears over further shutdowns in China. The AUD fell while the USD rose.
In our view, equities remain at high risk of further near-term declines. Stock markets have moved ahead of themselves in the rally from their June lows to their mid-August highs, recovering just over half of their earlier decline, helped by good earnings seasons in the United States. and in Australia.
As the US equity market became overbought and hit resistance at its 200-day moving average, it became vulnerable to central bank hawkishness and recession risks and pulled back.
Central banks, including the Reserve Bank of Australia (RBA), remain hawkish and far from an ‘accommodative pivot’, as evidenced by comments from various Fed and ECB officials last week; recession risks remain elevated, raising the risk of significant earnings downgrades; Historically, September has been the weakest month of the year for US and Australian equities, especially when markets are already in a downtrend; and geopolitical risks remain elevated in Taiwan, Ukraine and the United States over the medium term.
Australian Jobs and Skills Summit
While some fear this is just a talk party, if it helps resolve the impasse in addressing key labor market issues by bringing people together to find common ground on the way forward is a good thing.
And it looks like progress will be made, with key actions confirmed or likely in the following areas: an increase in the permanent immigration cap for this fiscal year to 195,000 (from 160,000) and increased training to help resolve shortage of labor and skills; measures to reinvigorate the company’s bargaining system to, in particular, relax the “best of all test”, which should help to increase productivity; and allow retirees to work overtime without losing their pension.
An announced return to multi-employer bargaining could be a big risk if not handled carefully, as it could impose cost increases on companies unable to cope and lead to increased industrial action, as was common in the 1970s. Problems with sectoral bargaining are part of the reason why company bargaining was introduced in the first place. The surge in immigration is also likely to aggravate the shortage of rental properties.
Monitoring of economic activity
Our Australian and European economic activity trackers plunged last week as they rose in the US. All suggest a loss of dynamism and a slowdown in growth. In Australia, restaurant and hotel reservations are at an all-time low.
Australian economic events and implications
Australian data was mixed, with booming retail sales, strong investment plans and weak housing indicators. Retail sales are 17.5% above their pre-COVID trend. This is likely exacerbated by inflation, but so far consumers continue to spend. Higher rates, falling confidence and falling real wages all point to a downturn ahead.
Construction and investment data were mixed in the June quarter. Construction fell, with declines in home building, non-residential construction and engineering, due to shortages and inclement weather. Reflecting this, business investment also fell slightly in the June quarter, but with an increase in plant and equipment investment.
Investment plans, however, remained strong, up 15% from a year ago, suggesting that despite the uncertainty, companies are still planning to boost investment.
Finally, the fall in house prices accelerated in August and has now spread to 7 of the 8 capitals, as well as to regional prices. Data from CoreLogic shows home prices fell 1.6% in August and are down 3.5% from their peak in April. Sydney prices lead and fell 7.4%.
We continue to expect a 15-20% drop from top to bottom through the second half of next year as ongoing rate hikes continue to have an impact. If the spot rate pushes well beyond 3%, as many expect, the price declines are likely to be deeper.
Five key takeaways from the June quarter earnings season now over in Australia
- Earnings growth in the prior year was solid at around 21.5%, in line with expectations at the start of the reporting season. That’s pretty good, considering last year’s lockdowns, disruptions, shortages and inflation issues.
- Earnings growth was led by a 280% gain in energy earnings and a 21% gain in materials, with the rest of the market posting an average growth of 10%.
- The upside surprises outweighed the misses by about 3 to 2, but the upside surprise has trended lower over the past 18 months.
- The best is probably behind us for now, with the proportion of companies reporting profits up (a year ago) and rising dividends falling and now below average (see second chart above). below).
- Earnings growth forecasts for this fiscal year are reduced, reflecting the impact of mounting labor cost pressures and expectations of slowing demand growth. Consensus earnings expectations for this fiscal year have fallen from around 8% to 6.5% over the past month.