Australian shares fell over the past week although still closed higher than at the beginning of the June. Falls mid-week were due to a delayed reaction to the previous weeks falls in the US, and partly due to talk of earlier rate hikes at home as well as COVID-19 concerns.
The latest COVID-19 lockdowns and a weaker inflation spike are, combined, likely to keep the RBA relatively cautious with rates during July.
Australian retail sales rose a less than expected 0.1% in May and the composite business conditions PMI fell 1.9 points in June. Retail sales saw the sharpest fall in Victoria (no doubt affected by the lockdowns) but it is still 8% above it’s pre-pandemic trend.
The Federal Government’s Intergenerational Report is due today and is expected to project a small economy than previously expected – this reflects the hit to immigration, and hence the population, but the key will be what happens to productivity growth. In the absence of major economic reforms, productivity growth is likely to remain relatively subdued.
On the COVID-19 front it has been more of the same – the global downtrend in new cases has been led by developed countries with India remaining in steep decline. However, the downward trend in new cases globally is showing tentative signs of bottoming out as many countries continue to see a rising trend in new cases (South Africa, South Korea, Indonesia, Russia, Brazil and Columbia). Perhaps we should add Australia to this list.
So far 23% of people globally and 48% in developed countries have had at least one does of vaccine. Canada is now at 68%, the UK at 65%, the US at 54%, Europe at 48% and Australia is at 27%.
The Market Outlook…..
Sharesremain vulnerable to a short-term correction with possible triggers being the inflation scare and rising bond yields, US taper talks and wider pull back from monetary stimulus, COVID-19 related setbacks and geopolitical risks. But looking through this short term noise, the combination of improving global growth and earnings helped by more stimulus, vaccines and ‘still low’ interest rates looks good for shares over the next 12 months.
Unlisted Commercial Property and Infrastructure are ultimately likely to benefit from a resumption of the search for yield (income), but the hit to space-demand and hence rents from the virus will continue to weigh on near-term returns.
Australian home pricesare on track to rise around 18% this year before slowing to around 5% next year, being boosted by ultra-low mortgage rates, economic recovery and FOMO (fear of missing out). You would, however, expect a progressive slowing in the pace of gains – here are 6 reasons why the residential market might start to cool in capital cities at some point over the next couple of years:
Affordability is becoming an issue.
Regulation appears imminent.
The cash rate remains low but rising bond yields are pushing up fixed mortgage rates anyway.
Government Stimulus measures will continue to be wound back.
Low immigration will continue to be a drag.
New Trends will continue to disrupt (such as the trend to remote working).
Cash and Bank Deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.1%. Shane Oliver of AMP suggests that the RBA won’t start raising rates until 2023, although given recent forecasts he has also warned that this may come forward to 2022.
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