Which key events have been driving markets? Watch this video of MLC's Senior Economist Bob Cunneen in discussion with Head of Investment Communications Jason Hazell.
Jason Hazell: Welcome to the monthly economic update, I’m joined today by Bob Cunneen. Welcome Bob.
Bob Cunneen: Thanks Jason.
Jason Hazell: I think we’ve finally seen the US Congressional approval of President Trump’s tax plan. So how have markets reacted to that?
Bob Cunneen: Markets have anticipated largely what has been implemented in December. So President Trump and Congress approved a very dramatic cut in the corporate tax rate, from 35 per cent down to 21 per cent. And the American share market has responded during the course of last year, by rising at a plus 20 per cent type return.
Jason Hazell: So what we’ve actually seen is the US markets have hit record high and on very low volatility, one of the lowest that we’ve seen for a long, long time. So what have US markets actually done?
Bob Cunneen: We’ve seen a strong rally since the lows in 2009. And we haven’t seen any significant correction in markets, for the last couple of years and that is giving a very low volatility reading. And essentially markets are very optimistic that with these lower corporate tax cuts, you’re going to see very strong profit results out of American corporations. Combine that with a very solid American economy, so consumers are spending, unemployment rate is low, there’s a very positive sentiment about the American share market.
Jason Hazell: Do you just think it’s just weight of money that’s causing that volatility to be quite low?
Bob Cunneen: It is essentially that the market has positioned itself for a buoyant American share market. So you could say in the sense that is the weight of money in terms of positioning. And the further the market goes, the more and more money is drawn into the market. So the weight of money gets bigger and bigger.
Jason Hazell: What do you expect the US Fed will be doing in 2018?
Bob Cunneen: The Fed in terms of the central bank will continue to raise interest rates. Last year in 2017, it raised interest rates three times, in total of 0.75 per cent. Now the Fed has given the same projection for this year, to continue raising interest rates, but it has emphasised it will be gradual. However, we need to be careful that if the American economy is doing so well, the share markets at record highs, unemployment is so low,the potential inflation risk is quite significant. Therefore, the Federal Reserve can surprise by raising interest rates more aggressively.
Jason Hazell: Turning to Australia, economic data’s been more mixed. How has the Australian market performed over the last month?
Bob Cunneen: In December itself, we had a good solid return of plus 1.8 per cent and we got some more encouraging data, in terms of retail sales picking up. Consumer sentiment, which had been a weak point in the Australian economy, has alsoimproved. And the labour market, we’re continuing to generate some very strong jobs growth. So we seem to have ended 2017 on a very positive note.
Jason Hazell: With all this positive news around, what are the risks that you’re worrying about at the moment and you think investors should consider, over the coming year?
Bob Cunneen: Firstly that the Federal Reserve will raise American interest rates more aggressively. The second aspect is the political risk in America. So President Trump is under investigation, the Mueller Commission in terms of Russian collusion. We’ve also got Congressional midterm elections in November of 2018. So the perception that these corporate tax cuts are permanent, might be challenged later this year, with some of that political risk. Also we have to be conscious that China is tightening financial conditions. So, what we’re seeing is that interest rates are gradually rising in China. So we have to be conscious that’ll put some downward pressure on China’s growth rate.
And for Australia, if things are improving in terms of economic activity, consumer sentiment, retail sales, the risk is that the Reserve Bank may contemplate raising interest rates, later this year. So that may be a surprise.
Jason Hazell: Great, thanks Bob and thanks very much for joining us today.