Monthly economic update with MLC, December 2019

Funds Management

by Ortenzia Borre

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MLC Senior Economist Bob Cunneen speaks to MLC Portfolio Specialist Sinead Rafferty about the end-of-2019 market rally, the rise in the Aussie dollar, and global uncertainty for 2020.

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: Thanks, Sinead.

Sinead Rafferty: Bob, it was a strong end to 2019 in terms of global share markets. Was this something of a Santa rally?

Bob Cunneen: It was. So, what we can see in terms of the global share market, it capped off an extraordinary 2019. Global shares are up 2.8 per cent. The real standout was the American share market was up 3 per cent for December itself, but was up 30 per cent for the year. Now, by contrast, the Australian share market was a little bit disappointing. It was down 2 per cent for December, but was up 24 per cent for the year. So, 2019 ended on a great note, all things considered.

Sinead Rafferty: One of the standouts for December was the Chinese share market, presumably driven by their trade agreement with the US. What actually are the details of that?

Bob Cunneen: Great question. We haven't seen the full details of the trade agreement between America and China. We've gotten some tentative detail. And what that basically involves is that America will cut the tariffs on about $120 billion of Chinese imports, from 15 per cent down to 7.5 per cent. It will also delay raising tariffs on about $250 billion of imports. Now, from China's point of view, it's committed to increase purchases of American farm goods, energy products, as well as manufacturing exports. So, from that point of view, we've got a trade truce, but it's only a phase one agreement, and it hasn't been signed yet. So, we need to see more detail, and we have to see pen put to paper, in essence, before we have an end of the trade tensions.

Sinead Rafferty: You mentioned as well that the Australian share market lagged global share markets in December. Why was that?

Bob Cunneen: Well, we've had basically a run of disappointing economic data in Australia. So, if we looked for the year itself on the economic growth data, it's been very disappointing. 1.7 per cent annual growth in the year to September. What we've also seen in particular is the Australian consumer is very reluctant to spend. So, you can see that in particular in retail spending -- very slow growth in retail spending -- but also falling car sales. What you've seen in terms of the share market itself in December was the Consumer Staple sector. So, that fell at about 8 per cent for the month itself. So, that disappointing performance in December largely reflected those concerns about the Australian consumer.

Sinead Rafferty: What about the Australian dollar? We saw it move higher in December, up to 70 cents against the US dollar. Was there a reason behind that rally?

Bob Cunneen: What we have to bear in mind, we've had stronger commodity prices, gains in iron ore and metal prices. So, that's helpful. We've had the trade truce, which is seen as a positive for global growth in 2020. So, the Australian dollar benefits from that story. But we also saw the market was short Australian dollars, so they had bet against the Australian dollar. So, what we're seeing is a bit of a correction to that short positioning, and some traders have been forced to buy Australian dollars. So, it's been a bit of a temporary rally in the Australian dollar.

Sinead Rafferty: And finally, one of the concerns for markets at the moment is the increasing level of tensions between the US and Iran. What is the likely impact on oil prices?

Bob Cunneen: Well, this has put a bid tone into the oil market, because Iran being a key supplier of oil in the Middle East, the concern is that if this intensifies, the conflict between America and Iran, oil supplies will be cut and therefore oil prices will need to move much higher to meet that shortfall in supply. This is a key concern and it will be on the radar for most of 2020 because neither side looks like it wants to concede. And with the assassination of the Iranian general in the first week of January, it's a particular concern that Iran has pledged revenge against America.

Sinead Rafferty: Thanks for your time, Bob. We'll watch and see what happens.

Bob Cunneen: Thank you very much, Sinead.

Sinead Rafferty: And thank you for joining us.