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3 Minute Economic Summary: July-August

Article By Adam Camac | | Financial Planning

  • The July-August period had a number of notable events with Australian and many global equity markets producing significant gains in July, but in late July and into the first week of August prices fell sharply caused by an unexpected intensification of trade tensions between the US and China by President Donald Trump.
  • Prior to this US equities were the best performing region, supported by a strong technology sector after solid company earnings results, and the US Federal Reserve cutting interest rates by 0.25% in a bid to extend economic expansion and insulate the US economy from weakened global growth.
  • The tweet from President Trump then sent markets falling, announcing higher tariffs from September on USD 300 billion of imports from China. These tensions then worsened further after the US Treasury Department later designated China as a “currency manipulator” - stating that the Chinese pre-set currency exchange level was too low in order to make its imports cheaper. Some of the market fall was recovered after Trump later announced that the tariffs would be delayed until December so as not to impact US Christmas consumer spending.
  • The Australian share market recaptured record highs over the month of July, the highest since before the GFC. This was driven by a recovery in iron ore and gold prices and a low interest rate environment.
  • Looking forward, economic data and surveys show that the global economy is still growing, with stronger services industries making up for weaker manufacturing. The International Monetary Fund still expects that while 2019 is shaping up to be a bit slower than last year—global gross domestic product growth of 3.2% compared with 3.6% in 2018— the broader world economy looks likely to maintain positive growth.
  • The unusually low levels of global interest rates (with the US and Australia recently cutting) have the potential to provide ongoing support to world shares through both the impact on company valuations and lending, and also through forcing investors to again hunt for dividend income (due to low interest rate returns). The major central banks are anticipated to keep monetary policy at supportive (i.e. low) levels for some time.
  • Further to the monetary policy help, the outlook for global markets depends significantly on two other factors. One is the outlook for the world economy, and in particular the outlook for the US economy, which remains a key driver for global growth. The other being the level of economic and financial impact of political uncertainty. This is primarily the US-China trade conflict, but also encompasses issues including Brexit and Hong Kong. It is the economic uncertainty that is weighing heavily on business confidence and likely delays investment and spending, further impacting economic growth.
  • In Australia the RBA has noted it is ready to cut interest rates again if inflation continues to be lower, and unemployment a bit higher, than the bank is targeting. Expectation is for another 0.25% cut, and possibly a second in coming months. As a result returns from bank deposits are likely to drop even further.
  • The cut to Australian interest rates also saw a notably drop in the Australian currency against the US (down to $0.67), as lower rates reduces international demand for Australian interest bearing investments. This does have the benefit of making Australian exports cheaper and benefits earnings from international companies/managed funds when converted to Australia Dollars.

 

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