With US and Australian shares falling below their October/November lows over the last week and concerns about global growth still intensifying, it’s still too early to say we have seen the low in shares. Here’s a possible road map though. Shares have a possible Santa rally over the next two weeks or so, but we get more weakness in early 2019, as global growth indicators remain softish. Which in turn prompts more stimulus in China, the Fed to pause, the ECB to provide more cheap bank funding and a bit of fiscal stimulus out of Europe (was Macron’s concession over the last week to the “yellow shirts” a sign of things to come for fiscal stimulus in Europe?). US/China trade negotiations make progress. Shares then bottom around March. Economic data starts to improve, and it looks like 2015-16 all over again (albeit a bit more compressed in time). Who knows for sure. But while I remain confident that a “grizzly bear” market (where shares fall 20% only to be down another 20% or so a year later) is unlikely because a US/global recession is unlikely anytime soon, a further leg down in shares turning the correction we have seen so far (with global shares down 11% from their September high and Australian shares down 13% from their August high) into a “gummy bear” market (down 20% or so from top to bottom but up a year later) is a high risk.

Speaking of the Santa rally, it normally kicks in around mid-December on the back of festive cheer and new year optimism, the investment of any bonuses, low volumes and no capital raisings. Over the last 10 years, the period from mid-December to year end has seen an average gain of 1% in US shares with shares up in this two-week period seven years out of 10, albeit it’s been less reliable in the last few years. In Australia, over the last 10 years, the average gain over the last two weeks of December has been 2.2% with shares up eight years out of 10, including in all of the last six years. Which is why December is normally a strong month. 

Source: Bloomberg, AMP Capital

Australian economic data releases over last week were nothing to get excited about. The ABS reported that house prices fell 1.5% in the September quarter, but this just confirmed declines already reported by private sector surveys, which show an intensification over the last two months. Housing finance rose in October, but this could just be a statistical bounce after several weak months. Consumer confidence was little changed in December, but business confidence continued to slip below consumer confidence after running above it since the 2013 election. The problem is that neither are particularly strong and with house prices falling and wages growth likely to remain weak, it’s hard to see consumer confidence rising much and a continuing slide in business confidence may threaten business investment. Finally, the CBA’s December business conditions PMIs slowed to still okay levels but are well down on last year’s highs.

Residential vacancy rates for the September quarter highlight the divergent pressures on the Australian property market. In Sydney, vacancy rates are above their long-term average and rising reflecting surging supply and this is driving falling rents. But in Melbourne they are below their long term average and stable as is the capital city average. And in Perth they are falling sharply. The key takeout is consistent with Sydney being most at risk in terms of property price falls.

Source: REIA, AMP Capital

Meanwhile the regular quarterly meeting of the Council of Financial Regulators (RBA, ASIC, APRA and the Treasury) noted the importance of lenders continuing to lend, but made no move to ease the credit tightening that is impacting the economy.

What to watch...

In Australia, the Mid-Year Economic and Fiscal Outlook to be released on Monday is likely to show that the Federal budget is running around $9bn per annum better than expected – thanks to higher than expected commodity prices and employment driving stronger tax revenue only partly offset by fiscal easing measures. This year’s budget deficit projection is likely to fall to around -$6bn (from a projection of -$14.5bn in the May Budget) and the 2019-20 surplus on unchanged policies will be projected to be around +$11bn (up from $2.2bn in May) with future surpluses looking even stronger. This is likely to enable the Government to announce around $9bn in income tax cuts and other pre-election goodies ahead of next May’s election and still maintain a surplus projection for 2019-20. The big risk of course is that the revenue windfall is not sustained as slower Chinese growth weighs on commodity prices, jobs growth slows, and wages growth remains weak. The Government’s growth forecast for this financial year of 3% is expected to remain unchanged but it may lower forecasts for 2.25% inflation and 2.75% wages growth as both look too optimistic.

The minutes from the RBA’s last meeting (Tuesday) will likely repeat the mantra that it expects the next move in rates to be up although there is no strong case for a near term move, but investor interest is likely to be on what the Bank has to say about the housing market and credit conditions with recent speeches suggesting that it may be getting a bit more concerned about the risks. On the data front, expect November labour force data (Thursday) to show a 10,000 gain in jobs and unemployment remaining at 5%. June quarter population data (also Thursday) will likely show some slowing in population growth to around a still strong 1.5% year-on-year.