Monthly economic update with MLC, May 2018

Funds Management

by Clive Tompkins

MLC Senior Economist Bob Cunneen discusses latest market moves and economic outlook with NAB Asset Management Portfolio Specialist Sinead Rafferty.

Sinead Rafferty: Welcome to this month's economic update. I'm Sinead Rafferty, portfolio specialist at NAB Asset Management, and I'm joined by our economist Bob Cunneen. Welcome, Bob.

Bob Cunneen: Thanks, Sinead.

Sinead Rafferty: What we've seen over the last couple of weeks is that European and Japanese markets have outperformed the US. What are the reasons behind that?

Bob Cunneen: Well, Wall Street has been under pressure because of the high interest rates story, and what's noticeable by comparison is that Europe and Japan, very stable interest rates, but also they've had the benefit of a lower currency against the American dollar, so that's helped Europe and Japan outperform.

Sinead Rafferty: And how has the Australian market performed?

Bob Cunneen: Well, for April itself, it had a strong performance. It returned about 3.9 per cent Now, that comes after a weak March, and what we saw are the standouts in terms of energy sector, so plus 10 per cent return for energy shares, that's largely on the back of higher oil prices. Health care was up about 7 per cent for the month, but against that, we had a weak performance from financial sector shares. The royal commission investigation into misconduct is weighing on bank shares at the moment.

Sinead Rafferty: And how has the Australian dollar fared?

Bob Cunneen: Well, the Australian dollar has been weaker against this American dollar strength, so what we're seeing because of this higher interest rate story, we're seeing capital flows towards America, and less so for Australia. And in that environment, the Australian dollar typically weakens. We've also seen in terms of the iron ore story, a little bit of softness there, so there is concern that the Chinese steel production is slowing down, hence less demand for Australian iron ore.

Sinead Rafferty: And we've seen oil prices rise over the last couple of weeks. Is there a key reason behind that?

Bob Cunneen: Well, what's a key concern at the moment is that America is pulling out of the nuclear accord. There was a joint agreement between Europe, China, Russia, to try and stop Iran getting nuclear weapons, and what we're seeing is America under President Trump has decided to withdraw from that accord, so the concern is that Iran, which is a major oil producer, it produces about 2.7 million barrels per day in terms of oil exports, if that's a concern in terms of sanctions by America, then the oil market may have a shortage of supply, hence rising prices.

Sinead Rafferty: And are there any other risks that investors should be concerned about in the next couple of months?

Bob Cunneen: Well, in particular, American interest rate risks, because they have inflation concerns with such a low unemployment story at the moment. We also have to be conscious that President Trump has announced tariffs on steel, aluminum, as well as some selected Chinese imports, so it's a concern for the global growth story if America starts to penalize exports from the rest of the world.

Sinead Rafferty: And what has been the market impact if any of the recent budget announcements?

Bob Cunneen: Well, the budget has been taken in its stride, because in terms of Australia's budget deficit, was going to see a profile where the budget moves into surplus one year earlier, 2019-2020, so that's helpful from a bond yield point of view in terms of less supply of government bonds into the financial market, but in terms of the tax cuts, they're very modest in terms of income taxes, and they're staggered over a seven-year time frame. So from that point of view, it doesn't say that there's going to be any kind of dramatic stimulus in the Australian economy. So from the growth point of view, Australian economy seems to be muddling along.

Sinead Rafferty: Thanks for your time, Bob, and thank you for joining us. If you'd like some further information, it's available on the web site where you launched this video.