The last quarter of the 2016/17 financial year
Australia
The old adage to “sell in May and go away” proved true in 2017, with the S&P/ASX200 down 3.4%. Concerns over Australia’s housing boom and weak retail spending, coupled with falling commodity prices, led to a steep and synchronised sell off in the big banks, miners and big name retailers.
Over the past 12 months the Australian sharemarket, as measured by the S&P/ASX200, gained almost 10%, excluding dividends. Yet in the past three months, sharemarket growth has been relatively flat, partly driven by the ‘Big 4’ Banks. The banks have been constrained over fears that the bank levy announced as part of the 2017 Federal Budget would flow through to lower investor returns.
The planned 0.06% levy on balance sheet liabilities is intended to tackle Australia’s budget deficit and is forecast to raise A$6.2 billion over four years – but it’s making investors a little wary. The sharemarket isn’t the only thing that fell in May. For the first time in 17 months Australian house prices fell. Is it a sign that lending restrictions are starting to dampen demand?
According to data from CoreLogic Inc., the decline follows the tightening of lending standards amid fears of a housing bubble. Adding to the drop off was the bank’s interest rate rise (particularly for interest only loans).
On a positive note, Australia’s unemployment rate dropped sharply in May to a four year low of 5.5%, beating expectations and allaying concerns about an economic downturn. This is Australia’s lowest jobless rate since February 2013.
Around the world
In the UK the ruling Conservative Party won eight seats less than required to form a majority government. While the results have been regarded as a shock by the Conservative Party, Prime Minister Theresa May is fiercely defending her position.
And that’s not the UK’s only issue. Stemming from the political uncertainty that has cast shadows over how the Brexit negotiations will take place, Britain has slumped to the bottom of Europe’s economic growth ladder. UK GDP growth in the first quarter of 2017 was at 0.2% and the lowest seen across all 28 members of the European Union (according to data released in May). Lower even than Greece.
As widely anticipated, the US Central Bank, better known as the Fed, raised interest rates at its June meeting for the second time this year and its Chair, Janet Yellen, made it clear she expects to do so again one more time this year.
The Fed’s action signals to the market that even without the successful passage of Donald Trump’s policies (lower taxes, infrastructure spending and less regulation) the US economy continues to improve. While the labour market in the US shows significant strength with a 4.3% unemployment rate, the most recent inflation reading of 1.5% is well below the duel mandated inflation target of 2%. Yellen is betting that weak prices are a temporary blip that will soon be forgotten.
