Share markets globally experienced sharp falls over June. More aggressive interest rate increases began to impact economies, as central banks declared the current inflation outlook their number one concern.
With bond markets pricing in continued hikes in cash rates over the next six months, central banks will achieve their aim to slow the global economy and hence, bring about a fall in the current inflation outburst.
In what is seen as a positive move, yields on longer-term bonds are stabilising. This has raised an expectation that rates in the US may start to be lowered during 2023.
In the US there are signs that inflation has peaked, with prices for houses and new cars beginning to fall. But this is being offset somewhat by increases in food and petrol (although this week, the oil price has seen substantial falls).
With the corporate reporting season commencing soon, the focus will be on how share prices respond to earnings downgrades. Businesses poorly positioned to the current increasing inflation rates are likely to be the most affected. I expect this will be a crucial determinant of day-to-day market movements over the next few months.
After a significant correction over the last nine months (particularly in the US and more recently in Australia), share markets are likely to consolidate around current levels and bounce around over the next six months. On average, bear markets last 12 – 15 months.
The aim of central banks is to slow demand in the economy, and hence create a fall in the current high inflation rates. Whilst their actions could cause a recession, it is not currently the base case.
News over the month
China to approve a US$220 billion stimulus package?
News released this week suggests that China may fast-track a major infrastructure spending package of up to 1.5 trillion yuan, to stimulate the economy as the country emerges from its recent COVID-19 lockdowns.
This mirrors the actions of many governments during the pandemic years. The focus is on major fiscal spending projects targeted around infrastructure to kick-start economies following extended lockdowns.
The news immediately affected global commodity markets, with copper rising around 4%.
Australia’s May trade surplus at record levels
Backed by surging global demand and ongoing high prices for our key commodities, Australia’s trade surplus in May hit a record high of $16 billion, an increase of 20% from the previous month.
Coal and LNG exports drove the larger-than-expected jump in the surplus, with the value of coal exports outpacing the value of iron ore exports for the first time since 2009. This resulted from the falling iron ore price, which has been weighed down by fears of a slowing Chinese economy and ongoing high prices for coal and LNG.
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