While share markets bounced from oversold levels early in the past week, they fell back to varying degrees, as worries around US interest rates, the US trade conflict with China, tech stocks and Italy’s budget deficit continued, along with tensions with Saudi Arabia regarding a missing journalist. 

All this left share markets mixed, with Eurozone shares up 0.3% and Australian shares up 0.7%, but US shares flat and Japanese shares down 0.7% and Chinese shares down 1.1%. 

Bull markets are characterised by relatively steady gains, punctuated by occasional sharp pull backs, as investors periodically cut their long positions on the back of adverse news events. 

Our view remains that recent falls represent a correction, but of course, it remains premature to conclude that we have seen the bottom, given the worry list around US interest rates, trade, oil prices, etc.

We continue to see the trend in shares remaining up as global growth remains solid, helping drive good earnings growth and monetary policy remains easy. However, the risk of a further short-term correction is high, given the threats around trade, emerging market contagion, ongoing Fed rate hikes and rising bond yields, the Mueller inquiry, the US mid-term elections and Italian budget negotiations. Property price weakness and approaching election uncertainty add to the risks around Australian shares.

The China syndrome

The US Treasury refrained from naming China as manipulating its currency and its been confirmed that Trump and Xi will meet on the sidelines of the November 29 G20 summit, but this does not mean the trade conflict is about to ease up. The currency decision was to be expected because the Renminbi does not meet all the US Treasury criteria to be defined as being “manipulated”. That said the report was critical of China and an “increasing reliance on non-market mechanisms” and so the US may still name it for manipulating next year. A Trump-XI meeting is positive but the gap between the two is huge so our base case remains that further escalation is likely.

Chinese economic growth slowed in the September quarter, with GDP growth slowing to 6.5% year-on-year and monthly data coming in mixed with weaker industrial production and credit growth but stronger retail sales and investment and lower unemployment. The slowdown reflects a crackdown on shadow banking and tariff uncertainty. While it’s consistent with our forecast for Chinese growth to slow to 6.5% this year, the trade threat suggests the risks are still on the downside, suggesting that further policy stimulus is likely. Meanwhile falling producer price inflation and core consumer price inflation of just 1.7% year-on-year provide no barrier to further policy stimulus.

The gig economy

And something completely different - is the “gig: economy just imagined? The term sounds cool and gets bandied around to explain things like low wages growth, but it’s doubtful it really exists. As the RBA’s Alex Heath pointed out in the last week, casual employment (i.e. workers without sick leave and holiday pay) has been around 20% of the workforce since the 1990s and the share of independent contractors has fallen over the last decade. And in the US, the share of self-employed in total employment has fallen from 14% to 6% over the last 70 years and workers are in their jobs for longer than 30 years ago. So there’s not a lot of evidence of the gig economy.

Down under

Another confusing jobs report in Australia – but it’s mostly strong. The September jobs report was confusing with soft employment growth but continuing strength in full time jobs and a sharp fall in unemployment to 5%. There are good reasons to be a bit sceptical about the plunge in the unemployment rate: sample rotation looks to have played a role and monthly jobs data is known for volatility. That said, jobs growth running around 2.3% year-on-year is still strong, leading jobs indicators are still solid and it’s hard to deny the downtrend in unemployment. So the RBA can rightly feel happy that this is going in the right direction. Against this though, the US experience has been that unemployment will need to fall a lot further to spark stronger wages growth, and the combination of unemployment and underemployment remains very high in Australia at 13.3% compared to 7.5% in the US.

Source: ABS, Bloomberg, AMP Capital

More broadly, there seems to be a tussle in Australia between booming infrastructure spending, improving business investment, bottoming mining investment and falling unemployment on the one hand, versus falling home prices, peaking housing construction, uncertainty around consumer spending, high underemployment and weak wages growth on the other. The outcome of this tussle is likely to be neither a growth boom nor bust but rather constrained growth and the RBA continuing to leave interest rates on hold out to 2020 at least.

And the Aussie dollar?

While the $A has now fallen close to our target of $US0.70, it likely still has more downside into the $US0.60s, as the gap between the RBA’s cash rate and the US Fed Funds rate pushes further into negative territory, as the US economy booms relative to Australia. Being short the $A remains a good hedge against things going wrong in the global economy.