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Australia contended with a (sort of) surprise interest rate cut on the eve of the Turnbull Government’s Budget. The RBA showed concern at the falling inflation rate and stubborn dollar, cutting the cash rate 25bps to 1.75%.
The Federal Budget left fiscal policy mostly neutral. The Government lacked courage with big ticket reforms, and instead proposed smaller measures across different portfolios. A few days after the Budget, the Government called a double dissolution election for July 2nd.
Globally, markets were fixated on “will they or wont they” increase interest rates in the US in June. For the most part, it was a “wont they”, until Fed Chair Janet Yellen spoke, bringing forward the prospect of a June hike. The US Dollar strengthened, leaving the Australian Dollar 5% weaker.
Oil prices firmed 5%, but other commodities fell as speculators in Chinese markets reduced positions. Iron ore closed 22% weaker and dragged down the Australian Materials sector 3.2%. Overall US stocks closed 1.5% higher, and Australian stocks +2.4%. The Australian stock market is now trading on a PE of around 16x, about 10% higher than long term averages.
Toward the end of the month, markets were pre-occupied with the growing prospect of BREXIT – Britain’s exit from the EU, and Zombies in China. With regard to BREXIT, the leave campaign was gaining popularity, and any success at the June 23rd referendum would suggest other EU member states might consider a similar move… possibly fracturing the EU. China’s zombies refer to the State Owned Enterprises which are laden with debt and deeply unprofitable. In recent months, the Chinese authorities have been dealing with the dilemma of letting some fail, organising debt for equity swaps and securitising debt. To date, this process is still being worked through.
