Aussie equities: what to watch for in coming weeks
Which factors are likely to impact Australian equities in coming weeks? Here’s an outline from Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.
THERE are a number of things to watch for in terms of potential market impact in coming weeks:
There may be some risk of disappointment on the policy front in coming weeks, as we move through the era of “peak policy”.
The rate of balance sheet expansion is likely to decelerate, while agreement on additional fiscal programs in the US will become increasingly difficult.
The market may also start to look through to the end of June when some of the initial measures start to roll back.
There are also some noises on the geopolitical front. The US has dialled up the rhetoric around China’s role in the coronavirus pandemic — and followed up with restrictions around Huawei’s access to American technology.
China, for its part, has been sending messages to Australia as various government officials call for an inquiry into how China initially handled the outbreak. Sanctions have been announced against Australian barley and beef.
Despite some noise we think material restrictions on iron ore are unlikely given the impact it would have on the Chinese economy. Nevertheless, further tension here could shake market sentiment.
We are nearing a roll-over in futures contracts of the kind that prompted a sharp fall in oil prices last month. Fundamentals have improved as some production has been shut in and the outlook for demand improved.
At this stage a re-run of last month’s volatility looks unlikely, but this week could prove to be a key test.
Key indicators of market sentiment
We think there are four areas that are helping gauge the market’s current sentiment:
1. Gold continues to climb higher. In some ways this is serving as an each-way bet. It is a hedge on central bank policy and the potential longer-term risks that come with massively expanded balance sheets.
However if it transpires that the policy response has not been enough and we start to see widespread bankruptcies, then it is also seen as a hedge in a risk-off environment.
2. Negative rates have been raised as a possibility in the US. The Fed says it isn’t required – while not ruling it out either. The US two-year note is still trading at a premium to cash rates, which indicates the market is not yet expecting negative rates – but this remains an area to watch.
Rates moving negative would suggest the economic outcomes are much worse than expected – and would also be very negative for sectors such as financials.
3. Corporate bond yield spreads serve as a good proxy for expected bankruptcies. These have stabilised after central banks stepped in to back-stop the corporate credit market.
Another blow-out here would indicate the market thinks things are moving beyond the control of policy makers.
4. The US Dollar was volatile through February and March but, like corporate spreads, has settled down and stabilised in recent weeks. Any signs of the USD breaking materially higher against other currencies could be a sign of increasing risk aversion and be negative for equity markets.
As restrictions roll back in Australia and overseas it is useful to track China’s trajectory as a potential guide. China retains material restrictions at a national level, while individual cities have seen lockdowns dialled back up in response to outbreaks.
China’s economic rebound was initially quite sharp, before slowing in recent weeks and then seeming to stall at about 90% of its previous level.
Persistent weakness in some areas of discretionary spending is holding the economy back from reaching its previous level.
It will be important to see if industrial production can continue to hold up if people are buying fewer discretionary items. Services (such as eating out) have been slow to respond. In the US there are expectations that 15% to 30% of restaurants may shut.
Durable goods and industrial production has recovered quite well. Auto sales, in particular, have seen a sharp bounce given an aversion to public transport.
This is feeding through to traffic, which is picking up and may move to higher levels than pre-COVID-19. This will be a key area to watch here and in the US.
It is becoming clear that some parts of the economy will pick up faster while others may see longer-lasting, deeper structural damage. This has important implications for portfolio construction.