Share markets fell sharply last week, led by the US share market, primarily on the back of worries about rising interest rates and bond yields and the deteriorating US/China relationship. More volatility is likely, even though it’s unlikely to be the start of a major bear market. Every so often, shares go through rough patches. We saw this most recently in February on the back of US inflation and interest rate concerns, which saw US shares fall 10% and Australian shares down 6%. Shares managed to get through the seasonably weak months of August and September surprisingly well (except in Australia) but the worry list has pulled them back down again. So far, shares are down around 7% from recent highs.

Given the ongoing worries around the Fed, inflation and bond yields, threats to tech stocks, the intensifying US/China conflict, rising oil prices, problems in the emerging world, the upcoming US mid-term elections, risks around President Trump and the Mueller inquiry and tensions in the Eurozone regarding the Italian budget, further weakness is likely. And given the usual global contagion, most major share markets, including the Australian share market, will be affected. However, we doubt it’s the start of a major bear market because history tells us that they invariably require a US recession. With US monetary conditions still far from tight, fiscal stimulus still impacting and no signs of the excess (in terms of overinvestment, debt growth, etc.) that normally precedes a recession, a US recession still looks a long way off and this in turn suggests that the trend in earnings and hence share markets is likely to remain up beyond the near term pull back.

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.

How confident are we?

Australian business and consumer confidence rose slightly in September and October respectively but both are well down on recent highs. 

How’s the property market heading?

Meanwhile, although housing starts fell in the June quarter consistent with falling building approvals and consistent with a peaking in housing construction activity, work yet to be done is at a record high, three times above where it was in 2009, telling us that there is still a lot of supply about to hit the softening homebuyer market. 

What about housing finance?

Housing finance also continued to slide, with commitments to both owner/occupiers and investors falling. All of which is consistent with ongoing falls in home prices.

What’s the outlook for residential property? 

National capital city residential property prices are expected to slow further with Sydney and Melbourne property prices likely to fall another 10% or so, but Perth and Darwin property prices at or close to bottoming, and Hobart, Adelaide, Canberra and Brisbane seeing moderate gains.

Source: ABS, AMP Capital

What’s the Reserve Bank’s position?

The RBA’s latest Financial Stability review remained positive on global conditions – but does see risks around trade and low risk premia - and remains relatively sanguine about the risks around the slowing Australian housing market and household debt. However, it does acknowledge that some existing borrowers may have difficulty refinancing and that it’s possible (but not probable) that tightening lending standards will worsen the housing slowdown. It is worth noting that despite all the talk about mortgage stress and foreclosures the major banks non-performing loans remain very low, although they have been rising mainly in WA.

What to watch this week…

In Australia, expect September labour market data, due Thursday, to show employment growth slowing to a gain of 10,000 after a surprise 44,000 gain in August but with unemployment remaining flat at 5.3%. Meanwhile, the minutes from the last RBA board meeting (tomorrow) are likely to show the RBA still expecting the next move in rates to be up but seeing no case to move now and the by-election for the seat of Wentworth will be watched closely in regard to the Government’s narrow parliamentary majority.