Below trend growth to continue
Global equity markets staged a sharp turnaround in October. It was led by the US where their Federal Reserve reassured markets that interest rate rises remain data dependent. Meanwhile, there was additional modest improvement seen in Australian business and consumer confidence.
Following a recent sharp decline , global equity markets staged a major comeback in late October. Developed market shares rose 1.2%, with the US market 2.4% higher.
The strong upward move was a result of the US Federal Reserve reassuring markets that future interest rate rises remain data dependent. There was also a positive consumer impact from lower oil prices, and stabilisation in Chinese economic data.
The US continues to underpin the global recovery and the US Federal Open Markets Committee (FOMC) was a big contributor to global equities moving higher. The US third quarter 2014 corporate earnings reporting season is well underway, with 70% of the S&P 500 index companies having reported. Of this number, 78% have reported earnings above their mean estimate and earnings growth in the third quarter is currently 7.3% year-on-year.
Given the prospect of continued earnings momentum, favourable impacts on consumer spending from weaker energy prices and a modest rise in US interest rates should be seen late in 2015. Any correction across global equity markets should be seen as a buying opportunity.
Disappointing results were recorded in the Eurozone where the Euro 100 Index was down 2.8% in October, largely as a result of further weak economic manufacturing and inflation data.
Chinese growth remained sluggish in October but is showing signs of stabilisation.
There was more improvement in Australian business and consumer confidence during October, and further momentum across the residential construction sector. It’s anticipated that interest rates will remain at their current low level well into 2015. However, a weaker currency through 2015 will start to provide a tailwind for certain sectors.
Australian shares gained a healthy 4.4% in October after their 5.4% fall in September.
After falling 6.3% in September, the Australian Dollar traded in a relatively tight range in October (US$0.8641 to US0.8911) to finish the month about 0.5 US cents higher at US$0.8794. There was little in the way of currency moving news with third quarter CPI figures in line with market forecasts – and in the middle of the RBA’s target range. The upward trend in unemployment figures continued, also as expected.
Based on median forecasts surveyed by Thomson Reuters, market expectations are for the Australian Dollar to trade at 86 US cents by end January 2015, 85 US cents by end April 2015 and 83 US cents by end October 2015.
According to the RP Data-Rismark Hedonic Home Value Indices,Australian capital city dwelling prices rose 1% in October, led by Sydney at 1.3% and Melbourne at 1.9%. Brisbane prices rose 0.6% but all other capital cities showed declines in October, highlighting weaker conditions outside the two largest cities. Over the past year, capital city prices rose 8.9%, with the highest gains in Sydney (13.1%) and Melbourne (8.9%), while price rises in other capitals were more subdued (0.9 – 5.6%).
Auction clearance rates continue to hover at around 70% and, although the number of new listings is higher, properties are selling relatively quickly. Annual price increases have been trending lower since April (when they were running at 11.5%). These may provide some relief for the Reserve Bank of Australia, which remains concerned about strong price rises and levels of investor-driven demand in Sydney and Melbourne. Over the past year, weekly rents have only risen 1.8%, pushing down gross rental yields to 3.3% in Melbourne and 3.7% in Sydney. After taking into account property ownership costs, net rental yields are well below term deposit rates.
With the rate of annual property price growth easing in recent months, it’s interesting to note that building approvals – which had been running at close to record levels for much of this year – fell 11% in September. This decline was split between apartments (down 22%) and detached houses (down 2.3%). While month-to-month data can be volatile, especially in the apartment category, it may show the market is stabilising – leading to a more balanced supply of new homes and apartments in the months ahead.
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