In terms of activity, the last two weeks have been rather ‘beige’ in my opinion – plenty point out that the US is making new record highs across their major three indices, that the ASX hit a four-month high and is threatening to break out to the up side while volatility high yearly lows and is bordering on ‘extreme’ complacency – all true. But beige markets are tough markets making the last two weeks a little ‘annoying’.
Several things to cover this week, volatility is definitely one, economic data is another finally the geopolitics of China – let’s start there
The Communist National People’s Congress (NPC) start Thursday, the closed door bi-decade event is expected to have a bit of everything: Leadership changes, policy direction, social direction and the part that matters to markets – economic direction.
For the past five years (even as long as 10) the outside world has been speculating on the financial and economic stability of China – the so called ‘hard landing’. It clearly won’t be as hard as forecasted but Beijing is beginning to formulate policy to curb financial risks. The biggest movement in policy has been the clamp down on capital flows and this will clearly be a huge topic of discussion for the NPC – financial stability is a corner stone of Xi Jinping’ Presidency – watch this space, expectations are high for increased measures around outflows in particular.
The second part of the economic direction point is infrastructure spending and growth targets. China’s 2010-2020-decade target was to double the 2010 GDP figure come 2020 – it is on track however, China would have to maintain its current growth rate (2017) to achieve this mandate in the allotted time frame. The question here is what impact will possible financial stability policies have on the growth policy, and will the NPC scrap the 2010-decade mandate? (I doubt it on the latter, the former however is up for debate).
The 2020-2030 mandate is the bigger question from an Australian-centric point of view. There is growing speculation President Xi is gearing up to re-publicise private-government enterprise, to revamp growth to a more domestic platform and is looking to increase financial stability controls (clamping down on shadow banking, local government lending and its debt ratios etc. etc.). Chinese investment in Australia and its demand for Australian exports are likely to see pressure in the coming five years if the speculated policy changes becomes actuals. The outlook for commodities over the long term would become clouded under such a scenario. On the immediate horizon, China data that will hit Asian trade this week: Q3 GDP figures on Thursday and the September figures for inflations, fixed asset investment, industrial production and retail sales figure Tuesday through Thursday – Dalian futures is where you see reactions.
Europe, the US, Asia and Australia release a range of monthly and quarterly pieces this week. However only really want to highlight the Australian data for now: Tuesday sees the minutes from this month RBA board meeting need colour around net exports, business conditions and CAPEX these are the justifications for its growth target, yet almost in the same sentence pointed to wage growth and inflation as possible risks in 2018. The RBA is clearly out of the market if the statement is taken out face value – the minutes may easy off this view slightly if colour does highlight growth as the more likely outcome of 2018.
The employment figures are due Thursday – leading indicators suggest September was a slower month than previous the question is has this filtered into employment actuals? 2017 is on track for the largest expansion in employment since 2005 which is positively impacting confidence which is good – however I want to see this impacting consumption which is declining – not good.
Look to the trend 12-month figure and look to full time employment versus part time. Full time is currently expanding faster than part time a trend that started in July and something that hadn’t occurred 2012, should be a positive in the AUD and a positive for economic outlook.
“Volatility begets volatility” – there is a lot of discussion currently about how low vol is. Since the GFC, high vol incidents have become expected parts of market participation to a point of being ‘normalised’. This view is missing the point of the quote: “volatility begets volatility”.
Volatility works in sets, in low vol periods, volatility works to go lower and lower still – current conditions are case-in-point, ditto in the reverse higher vol scenarios push vol higher and higher still – think the Eurozone debt crisis in 2012 or China’s hard landing fears 2011.
The interesting change in 2017 is that geopolitics is no longer impacting market behaviour as it was even as little as 24 months ago. 2017 has seen six major European elections, the swearing in of a Trump presidency, North Korea and the rise and rise of nationalism globally – yet vol hit a record low in the US and is near record lows in Australia.
Why? The underlying fundamentals of the global market is quite robust, earnings are justifying price and fund flows as much more stable, economic risks are considerably lower than they once where – its is these facts are nurturing the low vol environment – it might easy off the ‘extreme’ lows but outside an extreme unforeseen global shock low vol is here to stay in the immediate future.
Evan Lucas is an expert guest contributor to Fairmont Equities.
Evan is founder of The Lucas Review. Prior to that he was Market Strategist at IG. He is well known as an expert commentator in finance media such as Sky News Business, ABC1, the Australian Financial Review, CNBC, and Reuters.
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