21 Jun 2019
Central bank dovishness puts a rocket under equity markets
- Local and global equity markets rocketed higher this week in light of central bankers turning more dovish and investor optimism regarding a trade war resolution.
- In local stock news, AGL Energy abandoned their 2nd tilt for Vocus, walking away from their $3bn offer. The 2nd look-in at the books of Vocus either spooked them or they got what they wanted out of the “look-in”. It’s also possible large institutional investors of AGL forced the board’s hand.
- Coles’ share price rose after the company announced that it is targeting $1bn in savings over the next 4 years. The company also delivered an upbeat assessment of sales growth ahead.
- Caltex has downgraded profit guidance, confirming that refining margins are even weaker than expected and convenience has yet to materially recover in light of higher petrol prices.
- The iron ore price had a mixed week, pushing higher earlier in the week, before falling sharply later in the week due to Brazilian supply coming back online. Absent Chinese stimulus, expect the iron price to continue falling from here.
- The oil price fell early in the week on expectations of sluggish demand ahead, before rising sharply following Iran’s shooting down of a US drone.
- The Aussie dollar also had a mixed week, falling earlier on the week on dovish RBA comments, before the US central bank out-doved them, paving the way for imminent rate cuts absent a trade war resolution.
- The US central bank made no change to the Fed Funds Rate, but flagged the increasing likelihood of 2 rates cuts this year, in the absence of a trade war resolution.
- US retail sales printed slightly below expectations in May whilst US consumer sentiment took hit.
- Manufacturing data in the US pointed to further weakness, with a key survey recording its biggest monthly drop in history.
- European central bank president Draghi hinted at the possibility of new rate cuts or asset purchases (more QE) if inflation did not head back to its targets. Inflation heading higher is unlikely.
- Chinese industrial output slowed to a 17 year low in May, coming in below market expectations. In contrast, retail sales rose strongly, whilst private sector fixed-asset investment rose in line with expectations. The Chinese government’s stimulus to date has supported the “new” China, further stimulus will be needed to support the “old” China.
- The US rekindled trade talks with China, hardly surprising given how quickly US economic data has weakened more recently. China needs a deal in the short term in order to avoid a series of massive stimulus packages, whilst the US needs a deal in the long term to stave off recession.
- The mass protests in Hong Kong subsided as the nation’s leader apologised and dumped the proposed legislation allow extradition to China. Calls for her removal remain. China’s response, behind closed doors, will be interesting.
- US-Iran tensions escalated after Iran shot down a US drone. Iran claims the drone was in their airspace whilst the US claims the drone was in international airspace. President Trump fired off stern warning threatening retribution. An attack on a drone in international airspace is almost a declaration of war. The US confirmed they are sending more troops and military resources to the Middle East.
If you would like to discuss any of the information or meet with us, please feel free to call or email us by clicking here