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It is hardly the battering equity markets were enduring 12 months ago, but the past week has delivered Wall Street its first significant correction in 2019.
The week in finance:
- Housing finance (Tuesday) has been weak for months
- Business conditions (Tuesday) and consumer confidence (Wednesday) may show sentiment softening again
- Key Chinese data covering retail, industry and investment (Thursday) are likely to point to further cooling
The US market was down more than 2 per cent, falling for five days in succession.
China’s winning run halted abruptly having put on almost 20 per cent this year. Japan fell sharply too, while Europe was down a more modest 1 per cent.
The ASX battled through with a marginal gain for the week. But Friday’s 1 per cent fall and the futures market being in the red over the weekend don’t point to that exceptionalism lasting too long.
The retreat left the 10th anniversary celebrations of Wall Street’s post-GFC “bull run” a bit flat.
“Vulnerability has been building for a couple of weeks,” John Normand, JP Morgan’s head of cross asset strategy, told clients over the weekend.
Asset prices across the board had been rebounding strongly since their Boxing Day lows as fears of US recession eased.
Since then, a whole swag of data has turned out softer than expected and earnings forecasts have been cut.
Soft data hits the US
Friday saw more worrying news with US jobs growth almost grinding to a halt.
Only 20,000 new jobs were added in February, the weakest result since 2017. The market had expected 100,000 more.
While bad weather hit the construction sector, retailers pulled back in hiring as well.
It wasn’t all bad news though, with the unemployment rate dropping back below 4 per cent, wages growth at their strongest level in a decade and there was something of a payback from the outsized employment boom in January.
“That markets have stumbled isn’t surprising, even if the timing is somewhat random,” Mr Normand said.
Renewed concerns about global growth and general exhaustion (and profit-taking) from the strong three month rally was enough to quieten things down.
But is the party over? Probably not, according to Mr Normand.
“Current conditions do not look so conducive to a large correction … [and] do not resemble those that delivered the shocks of 2015 and 2018,” he said.
Markets on Friday’s close:
- ASX SPI 200 futures -0.2pc at 6,190 ASX 200 (Friday’s close) -1pc at 6,204
- AUD: 70.0 US cents, 62.7 euro cents, 54.1 British pence, 78.3 Japanese yen, $NZ1.04
- US: Dow Jones -0.1pc at 25,450 S&P500 -0.2pc at 2,743 NASDAQ -0.2pc at 7,408
- Europe: FTSE -0.7pc at 7,104 DAX -0.5pc at 11,458 EuroStoxx50 -0.8pc at 3,284
- Commodities: Brent oil -1pc at $US65.67/barrel, Gold +1pc at $US1,298/ounce, Iron ore $US86.50/tonne
Slowdown yet to hit ASX
The ASX’s 10 per cent year-to-date gain is impressive, but perhaps too much so.
The big (and bearish) broker Morgan Stanley is not convinced by the rally, noting the ASX’s performance lifted above a generally weak earnings season.
“Investors have taken higher cash distributions and traded on the hope that potential monetary and fiscal policy pivots can turn the economy and earnings cycles around,” equity strategist Chris Nichol said.
“We would fade such optimism,” he cautioned.
Morgan Stanley has one of the bleaker in-house views on the Australian economy, although its 2.2 per cent GDP growth forecast for 2019 is positively upbeat compared to the 1.9 per cent of UBS across the road.
Mr Nichol said macro data, particularly last week’s reports on Q4 GDP and retail sales, continue to disappoint.
“Housing exposed sectors remained a key point of weakness, with household spending subdued and an increase in the savings rate to 2.5 per cent is an important signal that household deleveraging is beginning and is likely to be a continued headwind to spending,” he said.
“Jobs remains the last pillar to fall that would confirm the breadth and depth of slowdown underway.”
Mr Nichol says investors punting on the RBA, or federal budget to come to the rescue are likely to be disappointed.
“The RBA appears to be waiting to be surprised — by jobs in particular — [while] the political narrative looks to be still some way away from meaningful stimulus,” he said.
Some budgetary surprise might be sprung in early April, but the Government’s desire to return the budget to surplus ahead of a federal election campaign may mean it is a bit of a fizzer.
Quiet week ahead
After last week’s data frenzy, things are bit quieter over the next few days.
Housing finance figures (Tuesday) should confirm what we already know; the appetite for both borrowing and lending has dried up.
Lending in January should be down for the third straight month. The rate of decline may have slowed, but given lending fell by 8 per cent in December, that’s not saying much.
Action at house auctions over the weekend once again pointed to weakness on fairly low numbers of properties up for sale.
The price slump is unlikely to find its bottom for some time at this rate.
Important readings of business conditions (Tuesday) and consumer confidence (Wednesday) will be published as well.
NAB’s business survey recovered a bit in January after a steep decline in conditions late last year. The key item to look for will be the employment section, and in particular hiring intentions.
The Westpac/Melbourne Institute survey of consumer confidence jumped last month, with the optimists regaining the upper hand.
Given the latest survey was conducted last week in the midst of some pretty dispiriting economic news, it would not be surprising to see consumers in a glum frame of mind.
Slightly left of centre, RBA deputy governor Guy Debelle’s Tuesday evening address on “climate change and the economy” should be interesting.
Overseas, the Brexit vote on Monday is unlikely to be second time lucky for PM Theresa May.
China’s monthly data dump (Thursday) is probably more relevant, if less riveting.
Retail sales and industrial production are likely to slip further in line with a general cooling in the domestic economy.
Infrastructure spending, or more correctly Fixed Asset Investment, should pick up thanks to yet another stimulus splurge.
Australia
| Date | Event | Comment/forecast |
|---|---|---|
|
Tuesday 12/3/2019 |
Business conditions | Feb: NAB survey. Plunged late year, now sitting at long term average. Employment expectations will be important |
| Housing finance | Jan: Crashed 8pc in December, probably won’t be as bad, but still falling | |
| RBA speech | Deputy governor Guy Debelle speaks on “Climate change and the economy” | |
|
Wednesday 13/3/2019 |
Consumer confidence | Feb: Westpac series. Optimists out-numbering pessimists after a bounce back in January |
Overseas
| Date | Event | Comment/forecast |
|---|---|---|
|
Monday 11/3/2019 |
US: Retail sales | Jan: Should rebound from December fall, but unlikely to be strong |
| CH: New loans | Feb: The taps have been opened, but may ease back from January’s gush | |
|
Tuesday 12/3/2019 |
UK: Brexit vote | The proposed exit agreement is likely to be defeated for a second time in the House of Commons |
| US: Inflation | Feb: Was flat in January, lower fuel prices will keep a lid on it again | |
|
Wednesday 13/3/2019 |
US: Durable goods orders | Jan: A proxy for business investment, has been weak |
| EU: Industrial production | Jan: A mild rebound expected after a sharp contraction at the end of last year | |
|
Thursday 14/3/2019 |
CH: Monthly data release | Feb: Retail sales losing momentum, industrial production slipping but infrastructure investment picking up |
| US: New home sales | Jan: Have been soft, but likely to pick up after a poor end to the year | |
|
Friday 15/3/2019 |
US: Industrial production | Jan: Slipped in December, but US factories doing better than most |
| JP: BoJ rates decision | No change, economy still pretty fragile |
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