Monthly economic update with MLC, March 2018

Funds Management

by Clive Tompkins

MLC Senior Economist Bob Cunneen discusses latest economic measures and market moves with Head of Investment Communications, NAB Asset Management, Jason Hazell.

Jason Hazell: Welcome to the monthly economic update, I’m joined again by Bob Cunneen. Welcome Bob.

Bob Cunneen: Thanks Jason.

Jason Hazell: We saw a return to volatility in the month of February. But I’m just interested to know how the month finished off, after the lows we saw?

Bob Cunneen: It was quite a turbulent month in February. So the opening weeks saw sharp falls in Wall Street. At one stage Wall Street was down nearly 10 per cent for the month, but actually made a reasonably strong comeback. So the net impact in terms of global share returns was a negative 3.6 per cent, but that also reflects a weaker Australian dollar. So from an Australian perspective, a lower currency has sort of mitigated the negative impact.

Jason Hazell: And we also saw a run-up in the US 10-year bond yield. But where did that finish towards the end of February?

Bob Cunneen: So the American 10-year bond yield rose quite strongly, so nearly approaching three per cent. Essentially what we’re seeing in the bond market is this concern about American inflation pressures. So wages rose at their fastest pace since 2009. Given such a strong jobs market in the United States, there’re concerns that with rising wages, there’s rising inflation pressures, hence higher bond yields.

Jason Hazell: What are the widening of spreads in the US credit markets telling us?

Bob Cunneen: That is telling us that it’s really a risk-off position at the moment. That both investors in the US share market, but also investors in the corporate bond market are concerned about future interest rates, future inflation pressures. Because of that, they like to lower their positions and hence, the prices have fallen.

Jason Hazell: Back to Australia. How’s the Australian market faired over the month of February?

Bob Cunneen: The Australian market was remarkably resilient. So we etched out a very tiny gain in the broader share market but all things considered, we’ve been quite resilient, because we were not as overextended as Wall Street was, running into January. And hence the pullback that we’ve seen was quite minimal.

Jason Hazell: And the Aussie dollar?

Bob Cunneen: The Aussie dollar was substantially weaker and so that’s helped boost the global share portfolio return. But what we’re seeing is the Australian dollar correct quite significantly. It came down from an 80-cent level, down to below 78 against the American dollar.

Jason Hazell: With all that in mind, what do you think investors should be focusing on over the coming months?

Bob Cunneen: Essentially, the key issue at the moment is the American inflation and interest rate profile. The concern is that if inflation pressures are building, a tight labour market in the United States, President Trump’s tax cuts, higher budget deficits, these are all adding to the risk that US interest rates move sharply higher. And with that, Wall Street is potentially vulnerable to a further correction.

Jason Hazell: Thanks for your time again today Bob.

Bob Cunneen: Thank you very much Jason.