Monthly economic update with MLC, October 2018

Funds Management

by Jessica Amir

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MLC Senior Economist Bob Cunneen speaks to NAB Asset Management Portfolio Specialist Sinead Rafferty about global markets, the oil price rally, Trump's China tariffs and the lift in bond yields.

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 Senior Economist, Bob Cunneen. Welcome Bob.

Bob Cunneen: Thanks Sinead.

Sinead Rafferty: It was another solid month of performance for offshore markets. Can you walk us through how the various regions performed?

Bob Cunneen: The standout was America, so the US share market was up about 0.5 per cent. So if you looked at the Standard & Poor’s 500-benchmark index, it made record highs in September. Now European shares also did quite well, they were up 0.5 per cent in a similar performance. But they’ve been lagging Wall Street over the last year, in particular. And actually Asian shares, some of the Asian share markets bounced back as well. So you had the Chinese share market, if you looked at the Shanghai index, was up 3.5 per cent. So a good solid performance for September.

Sinead Rafferty: Interesting that you mentioned that the Chinese market performed quite well, because that was on the back of quite a few negative months, on the back of the trade wars with the US. What’s the latest on that?

Bob Cunneen: President Trump announced tariffs on another $200 billion of imports from China. So that adds to the $50 billion that he initially announced back in May. So what we had is an escalation of the trade tension. But from the Chinese share market’s point of view, what’s helped the market rally is essentially the lower interest rates. So the Central Bank appears to be pumping in liquidity into the financial system, to support borrowers and to support the banks. So that’s helpful for the share market.

Sinead Rafferty: Turning to the US, we saw the US Federal Reserve or their Central Bank, raise interest rates as expected. What impact has that had, given the rise in bond yields increase in borrowing costs, what impact has that had on markets?

Bob Cunneen: It hasn’t dented Wall Street, so Wall Street is still running on the corporate profit story being so strong. So expectations for the September quarter are that profits will be up 20 per cent. However, what the Fed is actually signalling is some concerns about future inflation risk. So that’s why they’re essentially raising interest rates at the moment. And what they can see is that both by a combination of higher wages, but also higher oil prices in particular, they’re seeing that future inflation might be a problem for the United States. For now the Fed has indicated that their interest rate rises will be gradual. But the bond market is starting to tell us some concern there that maybe the Fed, will have to be more aggressive in raising interest rates.

Sinead Rafferty: You mentioned oil prices there; there was an escalation of oil prices in recent months. What’s behind that?

Bob Cunneen: The main impetus at the moment is sanctions on Iran. So Iran exports around two million barrels per day, so if we think of that, it’s about two per cent of global oil supply. So if we get that shifted off the global oil market, there’s a potential shortage of supply. There are also concerns about the American shale industry, whether it can continue to produce very strong supply. So that combination of Iran, plus the US shale industry, indicates there may be a shortage of oil.

Sinead Rafferty: Finally Bob, looking domestically. What about the Australian share market; it had a negative month for September?

Bob Cunneen: Yes Australia’s disappointed in September and it was down about 1.2 per cent. So it’s only a mild negative return. But what we actually saw, some of the sectors that did well during the year such as healthcare, which was down seven per cent, utility sector was down three per cent for September. So it was a bit of a pullback in terms of performance. Against that, we saw better returns out of the energy sector. So that reflects the higher oil price story, but also resources, they did quite well. We’ve seen iron ore remain quite resilient over the past year, compared to all these concerns about Chinese trade.

Sinead Rafferty: Thanks for your time Bob and thank you for joining us.


Jessica Amir

Finance News Network
Jessica joined FNN in January 2017 after having worked in financial advising for seven years and in TV journalism for seven years, specialising in finance, equities and analysis. She has interviewed former Prime Ministers of Australia, Tony Abbott, Julia Gillard and Kevin Rudd and ex Treasurer Jo Hockey. Jessica has worked as a journalist with Sky News Business, ABC 1, ABC's The Business, ABC24 and has also been a regional Channel 7 and 9 TV reporter with Prime7 and Win News.