By Shane Oliver
Chief Economist and Head of the Investment Strategy team
It’s been more of the same over the last week with worries about China, global growth and falling commodity prices led by oil continuing to rattle investors. So share markets have remained under pressure, commodity prices have continued to slump with oil falling to $US29.6/barrel for the first time since 2003 and bond yields falling further helped by safe haven buying and falling inflation expectations. While there were a few up days US shares lost 2.2%, Eurozone shares fell 2.9%, Japanese shares fell 3.5%, Chinese shares lost 9% and Australian shares fell 2%. Having broken below last year’s lows the Australian dollar looks like it is heading much lower – my view remains $US0.60 by year end.
With worries about global growth likely to linger we could still see more downside in share markets in the short term that could see developed markets including Australian shares follow emerging markets into a bear market (defined as a 20% decline – as measured against last year’s highs). Eurozone shares have already slipped into bear market territory with a decline of 20.4% from last year’s high, whereas Australian shares and Japanese shares are down 18% and US shares down 12% compared to their 2015 highs.
However, there are some positive signs:
First, economic data over the last week has been mostly okay, although the softness in US December retail sales is a concern.
Second, the Chinese Renminbi appears to have stabilised for now albeit helped by jawboning by Chinese officials and People’s Bank of China intervention.
Third, sentiment is starting to get very negative as highlighted by all the coverage given to the “RBS tells investors to sell everything” story. This is a sign we may be getting closer to the capitulation that usually presages market bottoms.
Fourth, while the ongoing plunge in commodity prices, and particularly oil prices, is bad news for producers its great news for consumers. I don’t normally do cut and paste jobs here but ran out of time and this chart from Deutsche Bank – highlighting that normal lags suggest that the bulk of the boost to G7 GDP growth from lower oil prices is ahead of us – caught my eye. I am not in the 4% growth camp for the G7, but it is a significant growth boost operating in the other direction to all the gloom and doom now building up.
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