MLC Senior Economist Bob Cunneen speaks to NAB Asset Management Portfolio Specialist Sinead Rafferty about global share market weakness, the bond market rally and the resilience of the Australian share market.
Sinead Rafferty: Welcome to this month’s economic update. I’m Sinead Rafferty, Portfolio Specialist with NAB Asset Management and I’m joined by our Senior Economist, Bob Cunneen. Welcome Bob.
Bob Cunneen: Thanks Sinead.
Sinead Rafferty: We saw some sharp market falls over the course of December, which led many global share markets into the red for 2018. What were the reasons behind that?
Bob Cunneen: There was quite a number of factors behind the global share market weakness. So if we looked at the trade war between America and China, we saw quite significant events. So firstly, there was a Chinese executive that was arrested in Canada. Then we had President Trump come out and say that he was basically a tariff man and hence, an escalation of the trade war would occur. Then we had the US Central Bank raising interest rates; then we had some profit warnings, as such. So these combinations of factors heavily weighed on Wall Street. So the American share market fell about nine per cent in December.
Sinead Rafferty: Japanese share markets fell quite aggressively in December, down by about 10 per cent. Was that driven by these trade wars?
Bob Cunneen: Yes, so basically the Asian share markets are very sensitive to the trade war episode, because they are heavily export-orientated economies. So both Japan, and China for that matter, are highly sensitive to this trade issue.
Sinead Rafferty: You mentioned that the US Federal Reserve raised rates in December, by 25 basis points. And the market is expecting perhaps that there’ll be less rate rises and going forward, than previously anticipated. Was that a reason behind the fall that we’ve seen in global government bond yields?
Bob Cunneen: Primarily the bond market rally that we’ve seen with lower yields, reflects the global share market weakness. But also helping that story is the fact that the American Central Bank has indicated that they see that inflation pressures are quite muted at the moment. So it’s quite sedate from their perspective. Hence the need to raise interest rates is not to a similar extent, as what it was in the past. So what they’ve indicated is that there’s likely to be two interest rate rises in 2019, compared to the four interest rate rises that we saw in 2018. So that in a way has helped Wall Street stabilise in recent weeks.
Sinead Rafferty: Interestingly, we actually saw Australia prove to be quite resilient in terms of the share market here, over the course of December. Why did Australia hold up so well?
Bob Cunneen: Yes, the Australian share market was remarkably resilient. So we only saw a minus 0.1 per cent negative return for December, compared to global share markets being down about 7.5 per cent. So that’s quite impressive. So what’s helped us is a lower currency, which makes us more competitive. It’s also been a case that our share market was weaker, earlier in the year. So the downside risk to our share market was quite limited.
Against that is the fact that some of our sectors did underperform quite significantly. So if you looked at financial shares, they were down about three per cent for the month. If you looked at communications and information technology, they were down between four and five per cent for the month. So there still was some weakness, but generally our market was quite resilient.
Sinead Rafferty: Thanks for your time Bob.
Bob Cunneen: Thank you Sinead.
Sinead Rafferty: And thank you for joining us.