9 Feb 2018
Markets fall on strong U.S economic data
Markets
- US markets were spooked by better than expected economic data, which could mean the US Fed has to go harder on rate rises than previously expected.
- The pullback in equity markets was long overdue given the pace in price rises over the last 6-12 months.
- Volatility in equity markets shot up to some of the highest levels seen since the GFC. Though, volatility is healthy.
- US 10-year bond yields moved closer to 3%, breaking through a 4 year high. The move is important as it may see non-traditional owners of equities shift back to bonds.
- In local stock news, Wesfarmers 1st half results disappointed the market, following a larger than expected write-down of their UK hardware business and a poor trading update from the division. The Australian business lines are continuing to perform well, however, Coles is struggling a little against Woolworths more recently.
- Macquarie provided a solid market update, guiding that the group expects to see 10% growth in the 2018 financial year result. The quarter saw strong infrastructure raisings, and strong deposit and platform growth.
- Commonwealth Bank of Australia’s 1st half result has been impacted by a $375m civil penalty provision they’ve taken as a best estimate of the penalty / fines that may be issued in the AUSTRAC case. This is in addition to the $200m provision for remediation programs linked to its financial planning breaches. On the positive side, the key net interest margin expanded and 1st half profit was higher than the same time last year.
- The Aussie dollar fell this week following the RBA’s decision to leave rates unchanged. The RBA flagged they were in no rush to raise rates. Rising equity market volatility also put downward pressure on the currency.
- The US is on track to produce an average of 10.59 million barrels per day of oil in 2018 and an even higher amount in 2019. The 2018 forecast would surpass the previous record set in 1970.
Economics
- Australian retail spending figures for December come in weaker than expected.
- The US economy added 200,000 new jobs in January, whilst December’s figures were upwardly revised. Average hourly earnings increased more than expected, with the annualised pace of growth the best since June 2009.
- A key US services index hit its highest level since mid-2005, whilst economy activity in the non-manufacturing sector grew for the 96th consecutive month coming in well above expectations.
- The European central bank president addressed the European parliament stating that core inflation remained subdued and that patience and persistence with regard to monetary policy was still warranted.
Politics
- US congressional leaders reached an agreement on a 2-year budget pact that would increase fiscal spending by US$300bn on the back of a big increase in military spending. The move should put an end to the risk of another government shutdown. The government’s fiscal deficit is getting larger at the wrong time.
- German leader Angela Merkel’s party and its former centre-left partner agreed on a formal deal to set up a governing coalition, avoiding the need to go back to the polls.
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