From Jonathan Bayes, Chief Investment Officer, Partners Wealth Group.
This week we rounded out over 4 months in the same 3% trading range, but the bottom of the range is beginning to look a little precarious.
Though we remain within the same trading range, this week we saw a notable shift in market leadership, with miners finally relinquishing some strength and oils catching a bit of a tailwind.
There are some reasons for this, but before I cover them off, perhaps it’s worth touching on the more important macro news we saw this week.
U.S Monetary Policy – this week’s Federal Reserve meeting. Markets a little complacent.
The Fed met this week and did largely what they were expected to do at a headline level – they left interest rates unchanged, and they confirmed ‘tapering’ of their massive balance sheet would begin next month along the lines described back in June.
So far so dull.
However, the tone of the remarks from the Fed Chairwoman seemed to indicate a more hawkish tone than that expected by markets, and I think this is worth paying attention to.
For context, lets understand that for the past 9 years investment markets have been cushioned by what has come to be known as the ‘Fed put’.
In essence it just means that whenever anything bad might flair up economically, the Fed would do their best to mollify any impact on investment markets and the economy.
It has proven worthy insurance for markets this past decade, but it seems increasingly likely that the ‘Fed put’ will soon be consigned to history.
As we have discussed numerous times this year, the Federal Reserve will begin to curtail its enormous $4.5trillion balance sheet, accumulated in the wake of the GFC, and this so-called ‘tapering’ commences next month.
Additionally, it is expected that interest rates in the US will rise over the next 12 months, however it seems increasingly likely that the market is underestimating the size and timing for rate rises, with Fed voting members ‘guesstimates’ pointing to an average of just under 4 x 0.25% rate rises between now and the end of 2018, well ahead of markets which currently are pricing in barely 1 x 0.25% rate rise.
The reason for the substantial difference seems grounded in the idea of the ‘Fed put’, and the belief that the Fed couldn’t possibly raise domestic interest rates 4 times whilst at the same time reducing liquidity by tapering its enormous balance sheet.
However, Thursday’s Federal Reserve press conference seemed to indicate otherwise, with much of it spent focused on underlying U.S economic strength, and the need for ‘continued, gradual interest rate hikes’.
It ‘feels’ like interest-rate markets are relying a little too heavily on the past, and perhaps complacently thinking the Fed will once again ‘go-slow’ on rate rises.
If it proves that the Fed indeed tighten rates more aggressively than markets currently expect, then we will likely see US and global bond yields a lot higher than we see today.
And that’s the rub.
With QE and ultra-low interest rates, bond yields have collapsed to significantly low levels, floating all other asset classes higher, including shares.
If US bond yields sell off nearer to 3% as is very possible, then it seems increasingly likely that global share-markets can pull back 5 to 10% to re-calibrate.
I have to say, it feels like the headwinds against share-markets are stiffening, but not in any dramatic way.
I think we will pull-back a little more before year end, but we been rather patient year-to-date, so I expect this will offer us up some opportunities to add to Aussie equity positions.
This week gone…
First one is just a random soapbox thing, but am I alone in feeling slightly offended by the size of executive pay that was reported on this week.
First, we had Alan Joyce at QANTAS (QAN) and his $25m remuneration, and then retiring Wesfarmers (WES) CEO Richard Goyder’s $100m+ in remuneration over a decade.
I have done this for over 20 years, and often you tend to bat an eyelid at the size and scale of dollar amounts in various different context, but when I thought about these numbers relative to actual job that they do (which is not to diminish a CEO role by any stretch), and then compare the pay packets to the man in the street, and the 20-year low in Australian wage growth, and is it any wonder that social tension is rising?
Rant over, but felt a bit of a sting when I read about both of those examples.
Miners pulled back this week as Chinese metals prices collapsed. Iron ore fell -7% and is now -20% lower than where it started September.
We have made a lot about the high inventory for iron ore, but it seems the turn in sentiment has emerged as steel inventories have begun to creep up.
With record Chinese steel production last month, and the belief that with many heavy industries forced to go slow this Chinese winter for pollution purposes, demand for steel will fall away, leading to lower prices across the board.
On the local economic front we didn’t learn a huge amount this week.
The RBA minutes were released, but shed little light on policy. The RBA remain confident things are improving, but continue to highlight the strength of the AUD as factor mitigating any rebound.
I can keep it rather short and tight this week.
There is a significant amount of cash ending up in investor portfolios in the coming fortnight – I think it is likely to be around 1% of your balances.
Be aware of this.
Have a great weekend.
Friday 10am Values
|S&P / ASX 200||5655||-83||-1.4%|
|Property Trust Index||1304||-29||-2.2%|
Thursday Closing Values
|U.S. S&P 500||2501||+5||+0.2%|
Key dates: Australian Companies
|Mon 25th September||Div Pay Date – ANZPF, Aurizon (AZJ), MBLPA, NABPC, WBCPE|
|Tue 26th September||Div Ex-Date – Blackmores (BKL), Oil Search (OSH)|
|Wed 27th September||Div Pay Date – Challenger (CGF), ASX (ASX)|
|Thu 28th September||Div Ex-Date – AMCOR (AMC), ANZPC, Healthscope (HSO), Medibank (MPL), Ramsay (RHC), Telstra (TLS), Wesfarmers (WES)|
|Fri 29th September||Div Pay Date – AMP (AMP), Bendigo Bank (BEN), Commonwealth Bank (CBA), QBE (QBE)|
For more information on the above please contact your Partners Wealth Group advisor directly or on 1800 333 143.