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Thursday, July 2, 2015

Weekly Market Highlights July (1)

Source: Amp Capital (here for full market update) & iCapital biz (subscription required)

United States
US data was mostly good, but the growth rebound after the March quarter soft patch is still looking slower than that seen last year. Housing indicators remain solid, unemployment claims and weekly mortgage applications are continuing to improve, consumer spending was strong in May and consumer confidence rose in June. But against this, the Markit business conditions PMIs for June fell to still OK levels. The Fed is on track to hike later this year, probably in September, but the trajectory of rate hikes is likely to be very gradual. The main focus will be on June manufacturing and jobs data (expect to see a 1% gain existing home sales (Monday), further gains in home prices and consumer confidence (Tuesday), a slight gain in the ISM manufacturing conditions index (Wednesday)
to 53, another solid 225,000 gain in June payrolls and a fall in unemployment to 5.4% (both Friday). Overall healthy news coming from the world's biggest economy.

The Greek saga continues. After getting a lot closer on a deal but then failing to quite get there, Greek PM Tsipras has now called a referendum for July 5 on the latest offer from Greece's creditors. This will probably pass with polls indicating two thirds of Greeks want to stay in the Euro, and around 56% saying that this should be the case even if it involves a bad deal with Greece’s creditors. The week ahead will involve significant uncertainty. A missed payment to the IMF on June 30 was handled by the IMF allowing Greece to be in "arrears" until the outcome of the referendum is known. If Grexit is the way it goes, at some point it will provide a big relief rally for Eurozone shares, as it will mean the whole silly, nearly six-year long debacle with Greece is finally over. It’s worth reiterating the rest of Europe is in far better shape now to withstand a Grexit than was the case through the 2010-12 Eurozone crisis so the fall out in financial markets should be limited.

China cuts interest rates again, expect more easing ahead. Benchmark 12 month interest rate was cut by another 0.25%, taking it to 4.85%, and has cut the required reserve ratio for some banks by another 0.5%. Chinese share market fell 19% from its high two weeks ago so it provided a reason to cut interest rates. More fundamentally, monetary easing is justified. Producer price deflation of around 5% year-on-year has meant real borrowing rates for many businesses are way too high. Expect the 12 month lending rate to be cut to 4% or below by year-end. 
But China saw some good economic news with the flash Markit manufacturing PMI up a bit more than expected to 49.6 in June and consumer confidence up 1% in June. That said, it’s hard to get too excited as the PMI is still wallowing around in the same 48-52 range it’s been in for four years now.

Japan's manufacturing PMI for June was disappointing, but other Japanese data was more positive with the unemployment rate remaining at its lowest since 1997, the jobs to applicants ratio rising to its highest since 1992 and household spending up strongly from its tax hike, driven low a year ago. Core inflation remains too low though at 0.4% year-on-year, indicating pressure remains on the Bank of Japan for more easing.

Official home price data for the March quarter confirmed that growth is mainly being driven by Sydney. While home prices in Sydney rose 13% over the year to the March quarter, the average pace across the other capital cities is just 2.2%. All Australian cities suffer from poor affordability, but after a couple of years of double-digit gains the Sydney market is looking a bit bubbly with buyers seemingly getting attracted by the pace of gains. It clearly needs to slow. 

Over in Malaysia, we just avoided a Fitch (rating agency) downgrade though I reserve my doubts as articulated in these articles: 
Fitch Ratings – How They Make Money By Making Clients Happy
No rest for Malaysia as investors seek fixes beyond Fitch approval
Things on the ground don't look good at all. Increase in CPI (up 0.4% from a month ago and 2.1 from a year ago) is an effect of GST implementation.
Car sales are down. Year on year basis passenger and commercial vehicles sales are down 8.0% and 11.5% respectively. Spending is dampen due  to unfavourable exchange rates as well as GST implementation increasing living cost tremendously.

Also our house price index is on the downtrendThe number of residential property transactions in the prime areas such as Kuala Lumpur and Penang saw YoY declines of 7.1% and 10.7% respectively within the same period. On the supply side, the incoming supply of properties continued to trend higher, particularly within the service apartment and condominium category, which expanded by 5.1% quarter-on-quarter (QoQ), significantly faster than the industry growth rate of 2.6% QoQ. Construction projects for property in the initial stage also increased by 23.1% on a QoQ basis, marking its highest level of growth since 1Q14. With the continued expansion of property supplies, the oversupply condition is poised to get worse. More supply, less demand = further declines in house index and price. 2017?
FSM In The Malaysian Reserve: Dark Days Ahead For Property Market?

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