Share markets had a mixed ride over the last week with ongoing global growth fears and messy US earnings news.
US shares lost 0.5% and Chinese shares remained under pressure falling another 3%. However, Eurozone shares gained 0.5%, Japanese shares rose 1.9% helped by a lower Japanese yen and Australian shares gained 0.7% with the recent Reserve Bank of Australia (RBA) rate cut continuing to help.
Bond yields generally fell, commodity prices were mixed with oil up but metals down and the Australian dollar fell below $US0.73 as the US dollar edged up slightly.
Another Greek blow up looks unlikely for this summer.
Renewed Grexit fears helped set off share market turbulence around mid-last year (and mid-2010, mid-2011 and mid-2012) but the same looks unlikely this time around. With Greece agreeing various reforms on pensions, taxes and contingent spending cuts it looks likely to pass the first review of its latest aid program.
European creditors are now starting to discuss debt relief based around longer maturities and lower interest rates.
There is a way to go, but at this stage it looks like another Grexit scare won’t be back in the headlines this year.
Impeachment trial of Brazilian President Rousseff only the beginning.
While Brazil’s Senate vote to commence an impeachment trial of Dilma Rousseff was initially greeted positively by the Brazilian share market, Brazil has a long way to go to get back on track.
Vice-president Michel Temer who is now acting president looks to be making market friendly appointments to his cabinet and looks likely to try to rein in Brazil’s 5% of gross domestic product (GDP) budget deficit with spending cuts and tax hikes.
However, the huge 20% plus rally in Brazilian shares that has already occurred this year in anticipation of Rousseff’s impeachment is likely to be tested as the trial will take many months.
Then the outcome can be challenged and even if Rousseff is ultimately impeached, President Temer would then remain in office until 2018 and he is unlikely to undertake the sort of reforms Brazil needs.
In the meantime fiscal cutbacks are likely to worsen Brazil’s already deep recession and in turn heighten political tensions which could see them reversed. A new election would help but that could be some time away and it’s not clear that it will result in a government focussed on undertaking the necessary economic and political reforms to get Brazil’s economy back in shape.
In other words Brazil’s problems are much bigger than Rousseff – they have just been exposed by the commodity slump.
Lowering Australia’s inflation target would be madness. Back around 2007-08 when inflation had pushed above 4% (both headline and underlying) some commentators were seriously arguing that the RBA cannot fight rising global commodity prices and so should just raise its inflation target.
Now we’re hearing that with inflation below target the RBA should just lower its target with some using the same argument about falling global commodity prices.
This is nonsense. The whole point of having an inflation target is to anchor inflation expectation around the target.
If it is just raised or lowered each time it looks like being seriously breached due to commodity price movements or whatever then those expectations – which workers use to demand wage gains, companies use in setting wage increases and prices and which help drive future inflation – will simply move up or down depending on which way the target is changed.
This is why it took so long to get inflation back under control in the 1970s and 1980s and why Japan has struggled to end deflation over the last two decades.
The RBA should simply ignore calls to lower the target.