- Equity markets mostly finished flat for the week.
- 2nd quarter corporate earnings season in the US got off to a good start with more than 75% of companies who have reported beating consensus estimates. Those estimates may be low, but the market is looking for reasons to be optimistic. Expectations are that 2nd quarter earnings will be 43% lower than the same time last year.
- Chinese stocks rose early in the week, led by the financial sector, after regulators lifted equity investment caps for insurers and encouraged mergers and acquisitions among brokerage houses and fund managers. Another government “encouraged” rally.
- The Aussie dollar continued to rise this week buying over 71.50 US cents for the first time since April 2019 as the US dollar continued to weaken.
- The Federal Treasurer detailed the damage done to the economy thus far, with a deficit of $86 billion in the last financial year and likely deficit of $185 billion for this financial year. The government has spent $289 billion in fiscal and balance sheet support, almost 15% of our economic output. More will need to be spent.
- The RBA governor reiterated that the economic recovery is likely to be slow and bumpy, unless a vaccine for the virus is developed. He went on to say that the Bank felt that “helicopter money” was unnecessary given the government can borrow easily and cheaply, putting the stimulus onus back on the government. He mentioned that the Board had discussed lowering the cash rate to 0.10% and also discussed options included negative interest rates and currency intervention, but that negative rates remain extremely unlikely.
- The chair of the Australian banking regulator will provide an update next week on direction and guidance for the banks. He maintained there was still a strong case for prudence but indicated that guidance will need to be modified as support measures can’t go on indefinitely. The regulator has extended its capital relief to the banks for their six-month loan deferrals until the end of March. 10% of loans in the banking system have had repayments deferred.
- Australian household card spending continues to rise versus the same time last year, up more than 11% with online spending up more than 22%. Now that the government has removed uncertainty regarding income support, expect that spending to continue. For how long, time will tell.
- Australian retail sales rose almost 2.5% in June, following a strong recovery in May, after the sharp falls in April. Food spending gained as stockpiling and eating from home continued, with spending on food now almost 20% above pre-virus levels. Spending on eating out rose 27% in June given some restrictions were eased but remains well below the same time last year. Spending on clothing and footwear rose by 19%.
- The Federal Government announced adjustments and extensions to their JobKeeper and JobSeeker programs, which 5 million Australians now receive. There will be two extensions, one from September to December and then from January to March. In both cases, there are reductions in the amounts being paid from the current program as the government looks to incentivise people to return to work. A March 28 end date was also mentioned. Absent a change in the government’s health policy approach to the virus, particularly the states’ approach (ie. Lockdown), March 29 will be a day of reckoning.
- US political leaders remained divided on the details of a new stimulus package, which could cost anywhere from US$1-3 trillion, less than two weeks before the already extended stimulus benefits are due to expire.
- European Union leaders have agreed to a new much needed economic recovery fund which will see $639 billion in grants and $590 million in low interest loans. Better than nothing, but less than was being proposed as 5 northern countries objected to a larger grants package. However, the deal marks a significant first step towards some sort of European fiscal solidarity.
- On the virus front, the increase in daily US infection cases and deaths began to slow as the week went on. Daily Australian infection cases rose this week whilst daily deaths remained very low. There was some promising news on the vaccine front with one of the vaccines appearing to be safe whilst producing an immune response in its first human trial. Still a long way to go on the vaccine front. The US government paid one potential vaccine producer for 100 million doses with an option for 500 million more. National interests are also going to be a problem here.
- Geo-political tensions remained high this week as PM Scott Morrison talked of another cyber-attack on the government, government entities and corporates by a foreign group, whilst the US ordered the swift close of the Chinese consulate in Houston which resulted in “fires” breaking out within the consulate. It appears those inside the consulate were destroying documents. China is likely to seek some retribution.
Chris Lioutas, Director, Insight Investment Consultants
Chris holds the position of asset consultant for Maxim Advisors and is a current sitting member of Maxim's investment committee.
With permission of the author, this article is presented by Maxim Private Clients Pty Ltd ASFL No. 511972
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