Monthly economic update with MLC, November 2018

Funds Management

by Clive Tompkins

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MLC Senior Economist Bob Cunneen speaks to NAB Asset Management Portfolio Specialist Sinead Rafferty about the volatility in global markets during October, what contributed to falls and the recently concluded US midterm elections.

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: Bob a lot to talk about this month; October saw a lot of volatility in markets and falls in the share markets globally. Can you give us an understanding of what occurred?

Bob Cunneen: We looked at the global share market; we had falls between minus five per cent and a negative 10 per cent type return. So if we looked at the Chinese share market down minus 9.6 per cent, the NASDAQ the US Technology Index, down 9.2 per cent. The global share market itself down 6.9 per cent, Australian shares down 6.2 per cent, European shares down 5.6 per cent. So very large falls, now there’s a combination of reasons for that. If we looked at it, higher American bond yields, so that has damaged Wall Street.

We’ve also seen some earnings guidance from some of the technology companies, Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOGL) basically indicating that the profit outlook for future years is not as robust, as what was previously expected. We’ve also had the trade wars, so the tension between America and China about tariffs, that seems to be escalating. Italy’s budget proposals are very contentious within Europe. So all these factors have weighed on global share markets.

Sinead Rafferty: Tell us a bit more about what happened in Australia?

Bob Cunneen: We obviously fell with global share markets themselves and all the sectors were down. So there wasn’t anywhere to hide in terms of the Australian share market. So we saw that minus 6.2 per cent negative return and information technology for example, fell 11 per cent, energy shares fell 10 per cent. Consumer discretionary stocks, so they fell about eight per cent. So there was nowhere you could immune yourself from these falls, apart from being in cash.

Sinead Rafferty: Despite that a lot of the data, particularly out of the US was quite positive. We saw the US unemployment rate fall further down to 3.7 per cent. Are we finally starting to see some wage growth?

Bob Cunneen: We have to bear in mind that the American economy is doing exceptionally well. Strong jobs growth, this low unemployment rate, which gives workers more bargaining power. And what we’re now starting to see, they are pushing for higher wages. So wages growth now above three per cent, indicates future inflation risks. And because of that, we’re seeing rising bond yields and with that, a threat to Wall Street itself.

Sinead Rafferty: A further question that’s more of a November event, but we had the US midterm elections and we saw some changes to the US House of Representatives. What do you think the impact might be on markets?

Bob Cunneen: Yes so this is a very interesting development with the Democrats taking control of the Lower House, the House of Representatives, but the Republicans maintaining control of the Upper House, the Senate. And this has important implications for the Trump administration, because the Lower House, the House of Representatives that the Democrats now control, can launch enquiries into President Trump’s past in terms of tax returns. It could also be canvassing the Mueller investigation into Russian collusion, during the 2016 presidential election.

So this makes it a much more difficult environment for President Trump in his last two years in office. And hence, it also means that the potential changes in economic policy in the United States, from a budget point of view are probably going to be limited. So we have essentially a gridlock in Washington.

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