Government struggles to sell the Budget. Is another election on the agenda?

16 May 2014

Markets

The local market finished higher this week spurred by positive company reporting and the Federal Budget.
Global markets were a mixed bag with the US and Europe giving up gains made earlier in the week, whilst Asian and emerging markets were buoyed by better than expected Chinese data and the Indian election result.
In local stock news, fertiliser and explosives producer Incitec Pivot surprised the market with a 7% increase in first half net profit, against expectations of a 20% decline. Result was driven by lower costs and greater productivity.
Chemicals, explosives, and mining services provider Orica provided their half year results with net profit lower than the same period last year. There is an expectation of an uplift in explosives volumes in 2nd half of 2014, so full year profit expectations are unchanged.
Healthcare related stocks came under selling pressure after the Budget highlighted a $7 co-payment to be made for GP, pathology, and diagnostic imaging visits.
The iron ore price continues to remain depressed given concerns regarding a sharper slow down in China. The drastic measures taken in Treasurer Hockey’s budget are aimed at getting ahead of these concerns so that there is room to stimulate in the years ahead if need be.
The Aussie dollar traded as high as 94c against the US dollar during week before settling back down at 93c. Improving conditions in our economy along with a weaker US dollar assisted.

Economic

Disappointing home loan and house price data indicated Australia’s housing boom is starting to taper. However, housing activity and prices will likely remain robust over this year supported by ongoing record low interest rates.
The UK’s unemployment rate fell to a 5 year low in the 1st quarter as the economy created work at the fastest pace in more than 40 years. The data also showed wage growth outstripping inflation for the 1st time since 2010.
Japan’s economy expanded at the fastest pace since 2011 in the first quarter as companies stepped up investment and consumers splurged before the GST rise.
China’s April inflation rose 1.8% over the last year, less than expectations of a 2% increase. Inflation looks to be well in check in China giving the Government wiggle room to stimulate the economy if necessary.
A closely watched German economic report showed economic sentiment deteriorated sharply to hit its lowest level in over a year. Broader Eurozone economic sentiment also fell sharply and against expectations of a rise.

Politics

Treasurer Joe Hockey has asked Australians to “contribute to the nation” by paying more for petrol and doctors’ visits, market rates for higher education, and higher tax rates for high income earners. The aim is to get the budget in a position where we can weather future storms (ie. sharper China slow down or collapse) like we did post the GFC. Hopefully voters, the Senate, and the States taking a longer term view to our country’s prosperity.
China has made its move less than a week after President Obama’s south east Asian visit in order to boost the US military presence in the region. A state owned oil and gas company dispatched a massive billion dollar drilling rig off the coast of Vietnam in disputed waters.
The Indian election is coming to an end with exit polls showing that Narendra Modi and his opposition party are poised for the nation’s biggest election victory in 30 years. He may become the 1st Indian leader since 1984 to rule with majority in parliament. Indian shares surged. A referendum was held in several regions of eastern Ukraine where residents overwhelmingly voted in favour of seceding from the country. Pro-Russian separatists in Ukraine drove the referendum.

PSK Weekly Wrap