Question

List and describe major systematic factors that had major influence over the Australian stock exchange from March 2020 to May 2020. These influences can be good or bad.

Answer 1

AUSTRALIAN DOLLAR GOING DOWN

We expect an improvement in global growth and trade. This view is partly based on an expected trade war truce between the U.S. and China, but also on a positive inventory restocking cycle which appears to be emerging. We are already seeing PMI indices in a number of countries starting to improve. While there are still a number of external risks and uncertainties, the backdrop for the global economy looks brighter in 2020 than last year.

We believe the RBA does not want to see a strong Australian dollar (AUD). This is because Australia’s major commodity exports such as iron ore and coal are priced in US dollars and a lower Australian dollar would also support domestic growth as well as putting upward pressure on inflation. While a stronger global economy would support the AUD we do not expect a dramatic currency move and a reasonable trading range for the USD/AUD in 2020 might be 65 to 75.

Putting It on the House

There are already signs that RBA rate cuts are starting to gain traction and stimulate the economy. The benefit of lower interest rates is most visible in Australia’s housing sector, which had until recently been in mild recession. Auction clearance rates in Sydney and Melbourne have nearly doubled, while home prices have risen by 5 to 10 per cent, depending on which region.   

Australia’s housing correction has turned out to have been a mild one. While house prices in Australia still look expensive versus history and the household sector still appears to be highly leveraged, mortgage rates are at record lows. Besides residential investment, a recovery in housing is also important for the outlook for consumer spending. There tends to be a strong wealth effect in Australia from residential property to consumer demand, operating with a lag of about six to twelve months. As long as the improving trends in housing continue, we should start to see a positive impact on consumer spending by the middle of 2020.

Real estate recovers, but construction lags

Australian house values are experiencing a rapid bounce-back, stimulated by a record low cash rate (currently 0.75 per cent), which the RBA is likely to cut again in the next few months.

At this rate, Sydney and Melbourne prices are expected to climb back to record highs, reigniting fears of a property bubble.

"We see them [REA Group and Domain] improving in 12 months' time, and expect positive outlook statements from them in the February reporting season," Ms Liu said.

SLOWDOWN IN INFECTIONS

Just as it appeared that April might be a repeat of March, stocks turned higher with signs of a slowdown in COVID-19 infections, especially in Italy and New York state. Though jobless claims were breathtakingly high, they were expected, allowing investors to focus on positive developments. A more stable bond market also helped support the rally.

The stock market struggled to move higher, as a weak start to earnings season and troubling economic data created some underlying crosscurrents.