China has been faced with high commodity prices – especially from Australian iron ore – and is looking to change the outlook. China has considerable reserves of major commodities and it is looking to influence prices by switching between imports and stock-piles. That could be bad news for Australia but, so far, there has been no deleterious impact.
While the UK government has been hands-on with COVID-related policies, it has not taken its eyes off negotiating new trade deals to replace the former relationship with Europe.
Russia, unlike most other major countries, has been hiking interest rates. It just hiked for the second time this year to take the base rate to 5%.
The Tokyo Olympics are very close now and problems with COVID abound. Apparently, the IOC, and not the host nation, is the body whose decision it is to cancel the games or not. It seems there is little appetite in Japan to continue with the games. Japan did just break one record; it recorded its first positive monthly inflation read in over a year – at +0.1!
With the 2020/21 financial year (FY21) having just concluded, investors who stuck with long-haul plans in equities would have done very well. With central banks likely to hold interest rates steady and vaccination programs continuing, we see no reason at this point to make major changes to asset allocations for FY22.
June recorded the ninth consecutive monthly gain on the ASX 200 making for a total gain of 24.0% over FY21. The 2.1% gains for June would have been much larger had the Financials sector not gone backwards. At one point the index broke through 7,400.
Utilities stocks lost around 22.9% over FY21 but all other sectors made solid ground. Consumer Discretionary, IT, Property and Financials were the best performing sectors during FY21.
The S&P 500 was the best performing of the major indexes we follow. Over FY21, the S&P recorded gains of 38.6% in line with the world index and just ahead of emerging markets.
The S&P 500 posted several all-time highs during June but we see gains continuing into FY22 including ending the month with five straight record closing highs!
Emerging markets (+33.6%) also out-performed the ASX 200.
Bonds and Interest Rates
The US yield curve steepened sharply from late last year until recently. Indeed, the long rates have come back a fraction to the extent that the 10-year bond yield fell below that of the 5-year yield, indicating an expected reduction in inflation.
At the last Fed meeting, Powell was quick to dispel rumours about rate hikes. However, the dot plots that display each committee member’s private forecasts over time revealed the committee now predicts two rate hikes for 2023. Since not all members vote, it is not yet clear what pressures are emerging, if any, against Powell’s stance.
The Fed’s forecasts for PCE inflation in the current and following two years are 3.0%, 2.1% and 2.0%. The corresponding GDP growth forecasts are 7.0%, 3.3% and 2.4%. If these forecasts come to pass, we see no problems for rates or equity markets any time soon. We think the Fed will start “talking about talking about tapering”, the Fed’s bond buy-back programme, this year.
The prices of iron ore and oil rose sharply over June while the prices of gold and copper fell. Our dollar slipped -2.7% against the US dollar.
Over FY21 the price of gold was fairly flat but the price of iron ore more than doubled. The price of oil nearly doubled over FY21 but the price of copper ‘only’ rose by just over 50%.
The labour market now looks healthier than it did just before the pandemic was called. There are more people now employed and the unemployment rate is back to 5.1%.
Apart from the impact of the current, hopefully brief, lock-downs there are plenty of businesses not back to where they were – especially in tourism and hospitality. It looks likely that we are well over a year away from a return to ‘normality’ but we are at least getting closer.
If the government comes good with its promise to start taking delivery of large consignments of Pfizer vaccine from October that puts us only about 8 months behind what we might have expected at the beginning of 2021. Of course, we don’t know how much damage has been done to residents’ perceptions about being vaccinated and living in a safe way after having received both doses. The vaccine communiques and policy shifts have been disturbing.
The Novovax vaccine, which Australia also ordered earlier in the year, has reported that its efficacy in the recently completed trial was an impressive 90% given the new, more virulent, strains that have emerged. They are hoping for FDA approval in the US in Q3. Hopefully, we can get supplies shortly after.
Economic growth has also made great inroads into a return to normal. However, we see the delays in vaccine rollouts and hesitancy of some residents to be vaccinated preventing any reasonable fear of our economy over-heating in the near future.
Whilst it is very inconvenient – and in some cases worse – to live through these stages of pandemic recovery, our residents have not been subjected to the health issues found in comparable countries. In that sense we are doing quite well but it will take continued co-operation of our fellow residents to get back to normal.
China’s 100th anniversary of its Communist Party has just taken place. The China economy has come a long way in that time but it is now facing strong reaction from major powers over how it conducts its business and political policies.
July 1st also marked the 24th anniversary of the handover of Hong Kong, by the U.K., back to China.
The China economy is doing very well and, through the ‘Belt and Road Initiative’ and others, the economy may well boom for many years to come.
While many deplored Trump’s China stance and his imposition of tariffs, Biden is not seemingly moving to reverse the tariffs.
The US economy is performing very well – particularly when compared to what analysts were expecting over a year ago.
The ISM is an index, like the PMI, that measures expectations of businesses about future growth. A figure above 50 indicates that expectations about growth are improving. The latest read for the US was 64.0 against an expected 62.5. This result is particularly strong.
As with Australia, we see growth, vaccinations and lax monetary policy underpinning growth in the stock market while likely new COVID variants and reticence to get vaccinated by a sizeable number of people will prevent overheating and inflation.
Europe and the UK are still squabbling about the parting of their ways. Since Northern Ireland (part of the UK) has remained inside the EU for now, some trade issues remain. The latest stoush is over the export of chilled meats – in particular, sausages from Britain to Northern Ireland. England is having more success negotiating new trade policies with the US and Australia, among others.
England just knocked Germany out of an international Soccer tournament for the first time in 55 years! 40,000 fans watched at Wembley including The Duke and Duchess of Cambridge. Few masks, if any, were spotted.
The recent uptick in infections in the UK and the expected roll back of all COVID restrictions from July 19 will be watched closely as people continue mingle in large numbers in sporting and entertainment venues.
Rest of the World
COVID rages around the world but Biden has offered 500 million doses of vaccine for poorer nations to match the rest-of-the world contribution. As welcome as these donations will be, another 10 to 12 billion doses are needed to control the pandemic to achieve herd immunity! The end of COVID is not in sight.