Monthly economic update with MLC, August 2019

Funds Management

by Clive Tompkins

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MLC Senior Economist Bob Cunneen speaks to MLC Portfolio Specialist Sinead Rafferty about share market volatility in August on the back of an escalation in trade tensions and the prospect of more cuts in interest rates.

Sinead Rafferty: Welcome to this month's Economic Update. I'm Sinead Rafferty, Portfolio Specialist at MLC, and I'm joined by our Senior Economist, Bob Cunneen. Welcome, Bob.

Bob Cunneen: Hello, Sinead.

Sinead Rafferty: Bob, it's been a poor month for global share markets in August. What was behind the rise in volatility that we saw?

Bob Cunneen: Primarily, it relates to the trade war between America and China. So what you saw at the start of the month, President Trump announced a 10 per cent tariff on $300 billion in Chinese imports. And progressively, as August developed, this trade war escalated so that on August the 23rd, President Trump raised that 10 per cent tariff to 15 per cent, but also raised the pre-existing tariffs from 25 per cent to 30 per cent. So this trade war has escalated and intensified, and that was the primary reason why global share markets fell 2 per cent in August.

Sinead Rafferty: What about in Europe? We're seeing a lot of headwinds on the back of the slowdown that we're seeing in Germany, and also what's going on with Brexit, or what's not going on with Brexit. So where to from here in terms of monetary policy in Europe?

Bob Cunneen: Yes, so Europe is particularly weak. So if we looked at the June quarter economic activity data, as measured by GDP, you saw both Britain and Germany's economies contract in that quarter. And that's a combination of the trade concerns, but also Brexit. And because of this, the European Central Bank has in recent commentary indicated that they're prepared to lower interest rates and potentially restart their asset purchase program, also known as quantitative easing. So we have a weak European economy that needs more stimulus to get back to their growth and inflation targets.

Sinead Rafferty: What about the gold price? We've seen it reach levels that we haven't seen since 2013. Is this our sign that investors are getting nervous about markets?

Bob Cunneen: It is a sign that they are concerned about political risks. So a combination of the trade war, the Brexit issue, Hong Kong tensions, Iran, North Korea. So the gold price is seen as a safe haven. And in this political risk environment, which is quite high, gold is seen as a good defensive asset. Against that is the fact it's also a low-yielding or zero-yielding asset, so you can't really generate an income stream from gold.So you need to be careful that it's not a sustainable long term investment if you're looking for yield. It's more of a defensive play.

Sinead Rafferty: What about the Australian share market? It was down 3 per cent in August after such strong performance that we'd seen earlier in the year. What was the reason behind that?

Bob Cunneen: Primarily, it relates to the trade war issue and the weakness in global shares, but it also reflects concerns about the Chinese economy in terms of demand for our raw materials. What was quite noticeable is that the iron ore price went from $115 per tonne down to $85 per tonne. So that saw a very sharp fall in our resources sector, nearly 8 per cent for August itself. So those China slowdown concerns are quite significant.

Sinead Rafferty: Is the market pricing in further rate cuts here in Australia?

Bob Cunneen: Yes, they are. So we had an interest rate cut in June and July by the Reserve Bank, getting the cash rate down to 1 per cent, and the market expects that the end point for cash rates will be closer to 0.5 per cent. So two further quarter-percent interest rate cuts are expected.

Sinead Rafferty: Thanks for your time, Bob.

Bob Cunneen: Thank you very much, Sinead.

Sinead Rafferty: And thanking you for joining us.


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