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Thursday, July 23, 2015

Weekly Market Highlights July (3)

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

Share markets have had a good week reflecting good news regarding Greece, better-than-expected Chinese economic data, the nuclear agreement with Iran and benign comments from US Federal Reserve chair Janet Yellen. The US dollar continued to drift higher with the perception that the US Federal Reserve is still on track to hike rates later this year (now that global risks have faded a bit) and this saw the Australian dollar, euro and yen fall. Commodity prices remained weak including oil on the back of the agreement with Iran. 

More oil to hit an already oversupplied oil market. Agreement was also reached between Iran and the US to curb the former's nuclear program and remove sanctions. Assuming it is finalised, this is good news, in particular to the extent that it will see a boost to global oil supply ultimately of around 1% per annum, providing another dampener on the world oil price. Over the last year world oil production expanded 3.1 million barrels per day, but demand only rose by 1.4 million barrels per day.

United States
US economic data was a mixed bag. While data for housing starts and permits, industrial production and the New York regional manufacturing conditions survey improved more than expected, June retail sales disappointed, the Philadelphia regional manufacturing conditions survey fell, small business confidence fell and consumer confidence slipped (but probably due to all the noise around Greece and China). Inflation readings were also mixed with producer prices up a bit more than expected but import prices remaining weak, and consumer prices in line with expectations.

So while US Federal Reserve Chair Janet Yellen is still expecting to raise interest rates later this year, it’s dependent on a further improvement in growth coming through and while the September US Federal Reserve meeting is ‘live’ for a hike it looks only 50/50 at this stage.

US June quarter company earnings are doing it again. Each quarter market expectations for US profits get guided too low and the actual outcome ends up being better. The same seems to be happening for the June quarter results, where the consensus started with a -5.3% year on year decline, but after 72% of results to date have beaten expectations has already been revised up to -3.2%. It’s likely to end up slightly positive. So yes the strong US dollar is impacting but not as much as feared.

Grexit off! - at least for now. Agreement was finally reached between Greece and its creditors on a path towards a new three-year bailout program. Greece has met its commitment to pass various reforms through its parliament, the deal has already been approved by several Eurozone parliaments including Germany and Finland, €7 billion in bridging finance has been arranged for Greece to make its near-term debt payments and the European Central Bank has increased its liquidity assistance for Greek banks. 

Given that the Greek economy will likely get worse before it gets better and debt relief is still a way off (after program reviews) another rebellion by Greece - reopening the prospect of a Grexit - remains a risk. But in the short term, Greece is likely to fade as an issue. The key for investors to bear in mind though is that the risk of contagion flowing from Greece to other Eurozone countries is now substantially reduced compared to several years ago - with other vulnerable countries now in much better shape and defence mechanisms much stronger. Through the recent turmoil the highest Italian and Spanish 10-year bond yields got to was just 2.4%, a
fraction of the 7% plus seen in 2011-12. 

There were no surprises from the European Central Bank which left monetary policy unchanged, but signalled a preparedness to ease if there is an unwarranted tightening in monetary conditions. A fall in May industrial production in the Eurozone was disappointing, but the European Central Bank's latest bank survey revealed no tightening in lending conditions and improving credit demand, which is good news given the background of the Greek turmoil.

The Chinese share market continued its recovery, helped by rumours that the China Securities Finance Corporation has up to RMB3 trillion (or A$652 billion) with which to buy shares if needed. The proportion of Chinese shares in trading halts has now fallen to 23%, from a high of around 40%. 

Chinese economic data was all a bit stronger than expected, confirming earlier signs that growth had improved somewhat. June quarter gross domestic product growth held constant at 7% year-on-year, but improved on a quarterly basis from 1.4% to 1.7%. 

The Bank of Japan left monetary policy unchanged but nudged down its growth and inflation forecasts a bit. Further easing is still possible with inflation well below target.

Not much exiting news in Malaysia, mostly 1MDB's never ending saga. The most interesting item to look forward is our Budget in the month of October as well as Q2 economic numbers in the coming weeks. This was in Bloomberg's front page news this week after Dow Jones tells PM's lawyers to school client. 

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