Between impeachment talks in the US, the UK Prime Minister seemingly giving unlawful advice to the Queen and protesters in Hong Kong continuing to rally in the streets – you could be forgiven for assuming global economic markets are a mess. However, these political dramas don’t necessarily translate into market volatility.
THE UNITED STATES: PRESIDENT TRUMP IN HOT WATER
One of the latest political developments in the US is an impeachment inquiry opening into President Donald Trump, announced by Speaker of the House Nancy Pelosi.
Pelosi set the scope of the inquiry to focus on the unfolding revelations about President Trump’s dealings with Ukraine, and the accusation that he withheld aid to leverage for information about his political rival, Joe Biden.
This comes in the midst of ongoing trade tension relations between the US and China, which currently show no signs of a resolution.
The impeachment inquiry does cause a bit of uncertainty for markets and for business, particularly in the US. However, AMP Capital ultimately believe that share markets will look through this noise.
It’s worth noting that it can take a while for impeachment proceedings to get anywhere, even though the first and major step has now occurred. Further, the next step is that the US Senate needs to agree to an impeachment, which as it stands, looks unlikely. The Republican party have a majority in the Senate, and it’s unlikely they would want to impeach President Trump within close proximity of an election.
THE UNITED KINGDOM: BOJO AND BREXIT
Although the happenings of UK Prime Minister Boris Johnson are dominating headlines, it’s the ongoing Brexit saga which is having the most impact on markets.
The Brexit deadline of 31 October is fast approaching, and there is still no sign of an agreement between the European Union and the United Kingdom being reached.
At this stage, AMP Capital think the most likely outcome is that Brexit will be delayed again. In this sense, it’s positive that we are not going to see a no-deal Brexit, because this would be disastrous for the UK. It would mean short-term disruption to all the UK’s trade channels, and a high chance of a near-term recession.
In saying all that, we note a previous position that the Brexit saga is not disastrous for the global economy. Rather, the UK is wearing the brunt of the impact.
CHINA: TRADE TENSIONS AND TAKING TO THE STREETS
Tensions in Hong Kong are ongoing, with protesters making international headlines and continuing to clash with local police. In terms of market impact, so far, this seems to be contained to Hong Kong, and is not being felt by global markets.
As far as China goes, the trade tensions with the US continue to impact global markets.
Lately, there’s been good news and bad news on the long-standing dispute. The good news is that tensions haven’t gotten any worse, which is an improvement on recent updates. What we don’t want to see is a re-escalation of trade tensions, and more trade tariffs to be imposed on top of what is already in place. That would have a negative impact on share markets.
At the moment, there’s a lot of uncertainty as to how this will end, and how much longer the dispute can extend. We think that ultimately President Trump does want to form some sort of deal with China before the election in 2020, but that may take some months. We aren’t anticipating a quick resolution on this.
More broadly, China’s economic data has been OK recently. There have been some signs that the manufacturing sector in China is stabilising, albeit at a low level, because of the negatives flow-on effects from the trade war with the US.
Further, Chinese policymakers are putting in place a lot of different forms of stimulus into the economy, and we think that is finally showing up in the data. That should be a positive for Chinese growth in the near-term, but any further escalation in trade would de-rail that recovery.
FINALLY, WHAT ABOUT AUSTRALIA?
As is always the case, the housing market continues to dominate the hearts and minds of Australians investors and market watchers. Speculation of boom-time conditions returning have started to surface, but the data paints a slightly different picture.
According to figures from CoreLogic, capital city dwelling prices rose 1.1% in September. Although this seems minor, it is a turnaround compared to a 10.2% decline over a 21-month period, which is worse than during the Global Financial Crisis of 2007/8.
Sydney and Melbourne led the charge, dwelling prices both rose a strong 1.7% in September, which is their fourth gain in a row.
Prices also rose in Brisbane, but only a fraction, by 0.1%. Prices in Canberra rose 1%, and there was no movement in Adelaide. For all remaining capital cities – Perth, Darwin and Hobart – prices fell. Perth prices are now down 21.3% from their 2014 high and Darwin prices are down 30.8% from their 2014 high.
Green shoots
No doubt, there is a bounce in home buyer demand in Australia. The impact of the Reserve Bank of Australia cutting the cash rate for a third time this year, the re-election of a conservative government in May and the banking regulator easing its guidance for lenders are all contributing to this.
Auction clearance rates also give an indication of what’s to come for the housing market in Australia over the next year. As can be seen in the below charts, the rebound in auction clearance rates points to a continuing rebound in home prices in the key markets of Sydney and Melbourne. Based on past relationships and patterns, the current level of clearances points to annual house price growth rising to around 10% to 15% over the next nine to 12 months.
Boom time conditions not on the horizon
Although the bottom of the property cycle is upon us, our base case at AMP Capital remains that house price gains will be far more constrained than what Australia has seen in most recent boom time conditions, particularly at its peak in 2016.
Key factors to consider here are that household debt to income ratios are much higher, bank lending standards are much tighter than they have been during previous housing recovery cycles. In addition, the supply of units has surged, with more in the pipeline. For cities like Sydney, this has pushed up the rental vacancy rate to above normal levels.
Unemployment is also likely to drift up, as overall economic growth remains weak.
For the immediate term, the Spring selling season in October is worth watching. If auction clearance rates and volume of listings continue to trend upwards, this will be a positive indication of continued recovery.
Diana Mousina is a senior economist at AMP Capital.
