Markets finally take some notice of poor economic data

Blog
Friday 31st July 2020

Markets finally take some notice of poor economic data

Blog
Friday 31st July 2020
Written by Chris Lioutas

Markets:

  • Equity markets largely saw selling pressure this week as virus and economic concerns dampened investor sentiment.
  • In local stock news, Vicinity Centres, the 2nd biggest listed shopping centre landlord in the country announced an 11.3% valuation decline across their portfolio of 60 properties. The decline is in line with previous guidance, and the result of rent waivers granted by Vicinity to retailers impacted by lockdown.
  • Listed fund manager Perpetual has launched an equity raising to fund its 75% acquisition in US asset manager Barrow Hanley for $465 million. Barrow Hanley employees will retain the other 25%. The acquisition will take Perpetual’s funds under management from $28 billion to $92 billion, and dilute the Australian equities representation to 14% of funds.
  • General insurer IAG (the old NRMA) flagged flat growth in premiums and announced it wouldn’t pay a final dividend for the first time in 19 years. 
  • APRA has eased restrictions on dividends introduced in April but has said that banks and insurers should still keep their dividend payout ratios below 50% for the remainder of 2020. It now looks likely that higher dividends won’t be seen until 2022.
  • The Aussie dollar continued its rise this week, breaking through 72c against the US dollar, as the US dollar continued to weaken on virus concerns and delays to the extension of stimulus packages.

Economics:

  • Australian inflation fell by 1.9% in the 2nd quarter, bringing the annual rate down to 0.3%, well below the RBA’s 2-3% target band. The fall in the quarter marks the largest quarterly fall since 1931. We’re a long way off even getting close to RBA rate rises.
  • Australian household card spending continued to track sideways but spending is up almost 10% on the same time last year.
  • Australian building approvals fell by almost 5% in June and now sit at an 8 year low. Private house and apartment approvals fell by similar amounts. However, the value of non-residential approvals rose by more than 17%. The outlook remains weak.
  • Australian import and export prices fell in the 2nd quarter with the overall terms of trade falling by 1%, which won’t help the economic growth number when it’s released.
  • The US central bank repeated their pledge to use its full range of tools to support the economy, but that the outlook will largely all depend on the course of the virus. They kept rates on hold at 0-0.25% and indicated rates will remain at this level for some time. The bank didn’t announce any new measures or give any new guidance.
  • Data showed that the US economy suffered its steepest contraction since the Great Depression in the 2nd quarter as a result of lockdowns. US jobless claims also rose last week.
  • Approximately 32 million Americans on unemployment benefits receiving US$600 per week in expanded jobless benefits will see that end this week unless it’s extended. Both sides of US politics have been disagreeing on the size and length of the next package. The Treasury Secretary said that the Trump administration supports the extension until the end of the year but wants the amount reduced so as to encourage Americans back to work.
  • Data showed that Germany’s manufacturing sector avoided contraction for the first time in 19 months in July, whilst other Eurozone data showed that business activity had returned to growth. However, Germany’s economic output contracted by more than 10% in the 2nd quarter, worse than the 9% predicted by economists.
  • China reported that industrial profits rose for the 2nd straight month in June and at the fastest pace in more than a year, but Chinese officials warned of continued uncertainty. 

Politics:

  • On the virus front, cases in Victoria continued to rise this week as tighter restrictions within the state look likely, whilst Queensland will shut its border to NSW again from Saturday. Britain has imposed a two week quarantine on travellers returning from Spain after rising cases. Virus cases and daily deaths continued to remain high in the US, but haven’t escalated from last week. One vaccine company has indicated that its vaccine may be ready for widespread use by year-end after it announced it had started a trial to demonstrate safety and effectiveness.
  • US-China tensions remain elevated after the Chinese retaliated to the closure of their consulate in Houston by taking over the US consulate in Chengdu.
  • Representatives of four of the US’s biggest technology companies will appear before the House of Representatives’ Antitrust Sub-Committee on Capitol Hill in an attempt to persuade lawmakers they aren’t abusing their wealth and power. Regulation is the single biggest risk technology companies currently face and it’s likely we’ll see more regulation in the period ahead.
  • US President Trump tweeted his support for delaying the November 3 elections until it is safe for Americans to vote in person. Both sides of politics immediately rejected the idea. The concern is that extensive mail-in voter fraud will occur if the US allows wide-spread votes by mail. Recent charges and arrests relating to mail-in voter fraud would seem to suggest he may be right.


Author 

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

Maxim Private Clients Pty Ltd ABN 47 611 614 398 AFSL No. 511972

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