June's Market Outlook
Market disquiet over the European situation deepened through May and into June, with a wholesale clear-out of ‘risk’ positioning playing out accordingly. Commodities, commodity currencies, emerging markets and advanced country equity positions were sold heavily, with an associated scramble for safe haven assets. Canada found time to raise interest rates while all this was going on, while Q1 GDP outcomes in Asia were well above expectations. Our basic position is that the market reaction to Europe has been overdone, and growth trades will be cautiously rebuilt in the months and quarters ahead. However, the structural legacy of the financial crisis will be constantly with us, with painful reminders of the same interspersed with the positive news of cyclical economic recovery.
Australia: The RBA paused at 4.5% in June, as expected. There is now a great deal of pressure on the next inflation update to validate the renewal of the tightening cycle. The Australian dollar had a difficult month, traversing a wild range that included the low 80¢ area. The 2010 Budget, which highlighted Australia’s privileged debt position relative to its OECD peers, also caused a firestorm due to the announcement of a Resource Rent Tax. We have the details on page 14.
New Zealand: The 2010 Budget went further than expected on tax reform, with personal and company tax rates cut and the GST hiked. We see fiscal policy as net stimulatory in the near term – and inflationary. The RBNZ is expected to begin its long awaited tightening cycle in June, despite developments in Europe.
United States: The manufacturing sector solidified its recent gains through May, the employment picture took a turn for the better in April, and a flurry of housing activity associated with the expiring tax rebate were all positives of the recent past. However, the maximum impetus from fiscal stimulus and inventory adjustment will fade all too soon, and the structural headwinds to growth will begin to reassert themselves.
Europe: The Greek word for the German schadenfraude is epikhairekakia.
Japan: Prime Minister Hatoyama resigned on May 2, bringing an end to a bumbling nine months as leader of the DPJ. The resignation came in response to a diabolical popularity rating that plumbed new depths due to an ineffective handling of the Okinawan US air base issue. The ruling coalition is in a tenuous position approaching Upper House elections within two months.
China: The economy is in deceleration mode. China’s recovery is more mature than those elsewhere, as it rebounded first and cleared its inventory build-up the fastest. Policy makers are now trying to finesse the various sectors to achieve the modestly inflationary, around trend growth that seems to best fit their template. Success is not necessarily assured though, as the major drivers of the investment cycle, infrastructure and real estate, could both be slowing at the same time by late this year.
Asia: Our on the ground feedback indicates that North Asian policy makers are still rather cautious, with the European situation and a potential deceleration in China feeding their unease. While we observe that growth momentum was superlative in Q1, certain aspects of the acceleration are temporary in nature and internal demand is not quite as robust as headline GDP implies.