Investment markets and key developments over the past week
April 25, 2018
(AMP Capital) 20 April 2018
The news flow was less dominated by politics this week and more by positive economic developments which gave share markets a boost. US shares were up by 0.5% (and have recovered around 4% from post-tariff March lows), Eurozone shares were 1.3% higher, Japanese equities lifted by 1.8%, Australian equities were 0.7% higher while Chinese stocks are 2.9% down over the week.
Commodity prices have been surging recently, particularly for aluminium, nickel and oil. Current US sanctions against Russian producers (and the threat of more sanctions) as well as some supply concerns have caused a surge in aluminium and nickel prices which is likely to continue in the near-term. Oil prices have been rising steadily because of supply concerns following tensions in the Middle East. Broad commodity prices strength is also a sign of continued synchronised global growth. But, if commodity prices move too high too quickly, this will be negative for equity markets because of inflation breakout fears, with commodities a large input into global production. This inflation fear started becoming evident in the back end of this week with US yields moving higher and 10-year yields around 2.96%. Despite the strength in commodity prices, the Australian dollar moved lower this week to 76US cents as the US dollar gained some strength.
Stability in the Chinese economy is also positive for commodity price gains in the near-term. While the medium-term outlook is still for lower Chinese economic growth, the economy has been stronger over the first quarter of 2018 and there may be some more upside over the next few months. Property investment and government spending has been showing stronger signs of growth and is something to watch. This week, the People’s Bank of China (PBoC) cut one of the lending rates in China – the reserve requirement ratio (RRR) by 1% for most banks. This is not a change in monetary policy but a liquidity management tool. The RRR puts a limit on the amount of deposits required in the banking system and the cut was done to assist banks (particularly smaller lenders) in helping to meet balances on medium-term loans.
It was good to see another positive World Economic Outlook report from the International Monetary Fund (IMF). The IMF kept global growth forecasts unchanged at 3.9% in 2018 and 2019, the strongest level since 2011, which are unchanged on the IMF’s last update in January but are above forecasts made in October last year. And after years of revising global growth forecasts down, the IMF has been revising growth estimates up (see chart below) lately.