Equity markets were strong during April with the Australian ASX 200 up about 4% and International markets were up 2.8% (MSCI world $AU).

From their early April low Australian shares are up 5.5% and have been helped by reasonable earnings news from Australian companies, solid commodity prices, a fall in the Australian dollar which makes Australian companies more competitive and some fading in trade war fears. But it’s not just the Australian share market. Eurozone and Japanese shares have had even stronger rebounds from their lows helped by a fall in their currencies. But the rebound in the US$ has constrained the US share market.

There were no surprises from the Fed which remained on hold but remains on track for more hikes. The Fed is upbeat on growth and recognises that inflation is close to its 2% target and will soon run above it. Its new reference to the inflation target being “symmetric” indicates it won’t slam on the brakes just because inflation is above 2%. But it remains on track for more “gradual” rate hikes. We expect three more hikes this year with the next move to come next month at which point the “dot plot” will move up to three more hikes this year too.

There were also no surprises from the Reserve Bank of Australia which also left rates on hold – for a record 21 months and is set to leave them on hold for much longer. While the global backdrop, business conditions, non-mining investment and infrastructure activity are positive and will lead to some acceleration in growth, uncertainty remains around the outlook for consumer spending, household debt is high, banks are tightening lending standards, wage growth and inflation remain low and will pick only gradually and house prices are falling. As a result, the RBA is likely to remain on hold for a long time yet and we don’t see a rate hike until 2020 at the earliest.
May is going to be a big month on the geopolitical front with various US allies’ exemptions to the steel and aluminium tariffs expiring on May 1, the US deadline to fix the Iran nuclear deal expiring on May 12, the public consultation period for tariffs on China due to expire on May 21 and the US Treasury Secretary due to report on proposed restrictions on Chinese investment in the US by May 21. So far so good with the US reaching deals with Australia, Argentina and Brazil on the steel and aluminium tariffs and extending the exemption for Canada, Mexico and the EU until June 1. Negotiations between the US and China have also started on trade, but it was no surprise that the initial two-day negotiation ended without resolution of key issues. A disagreement over trade practices that has built up over more than two decades will take more than two days to resolve. But at least they have shared views and agreed to keep talking.
Volatility in share markets is likely to remain high as US inflation and interest rates move up and as issues around President Trump (trade, Mueller inquiry, etc) continue to impact ahead of the US mid-term elections in November, but the medium-term trend in share markets is likely to remain up as global recession is unlikely and earnings growth remains strong globally and solid in Australia.
National capital city residential property prices are expected to slow further as the air continues to come out of the Sydney and Melbourne property boom and prices fall by another 5% this year, but Perth and Darwin bottom out, Adelaide and Brisbane see moderate gains and Hobart booms.
Cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.2%.
The A$ is short term oversold and due for a bounce, but it likely has more downside to around US$0.70 as the gap between the RBA’s cash rate and the US Fed Funds rate pushes further into negative territory. Solid commodity prices should provide a floor for the A$ though.
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