If it ain’t broke, don’t fix it

  • Viva le Euro!
  • Let’s try this again
  • Saver’s taxed
  • Forget the rulebook

All eyes are fixed on round two of the French presidential election, happening this weekend. That is, all eyes except investors’, who are on a high. They seem to think the election has already happened.

The winner? Centrist Emmanuel Macron.

The Euro has jumped up to 1.09 against the US dollar. Investors are betting on optimism in the continent’s recovery. As reported by foxbusiness.com:

Local stock markets just had their best week this year following the first round of the French presidential vote, and investors have poured money into the region’s equity funds at the fastest pace since 2015. The euro climbed 1.6% against the dollar in its best week since July.

All this comes as investors start to look beyond political risks and focus on the continent’s strong economic recovery.

It’s true that Macron is ahead. The latest Bloomberg Composite  poll has him leading with 59.5%, compared to Marine Le Pen’s 40.5%.

But things are far from over.

Le Pen is doing whatever it takes to win the election. In an effort to broaden her appeal, she has quit the National Front’s leadership and is taking a step back from her signature policy. That is, Frexit — France leaving the Euro.

All throughout her campaign, Le Pen promised to hold a ‘Frexit’ vote if she wins. Yet last weekend, she backtracked. Even though she believes ‘the euro is dead’ there is no rush to exit the euro, she said. The fact is, she still wants two currencies, one for France’s daily use and another for international trade.

The problem is, 70% of French like the Euro, so it could be a hurdle for Le Pen to convince voters.

Yet, even though the markets don’t want to see it, Le Pen is still in the running. And could get ahead if there is a low voter turnout. Just think about this: 22% of voters didn’t turn up for the first round and nobody really has a clue how they will vote on the second round, or if they will even show up to vote.

Whatever the case, the recent vote has shown one thing: things are changing in France. For the first time since the Second World War, the far right is very close to winning the presidential election and neither of the two major parties are a part of the second round. The two ‘newbies’ are total opposites: pro-globalisation against euro-phobia.

The markets may be giving Macron the win, but there is definitely frustration in the country. Once again, we have a divided country. You can remember what happened the last two times we were in this position….

More after the markets.

Markets

Over the weekend, the Dow Jones Industrial Average fell 40.82 points, or 0.19%.

The S&P 500 fell 4.57 points, for a 0.19% drop.

In Europe, the Euro Stoxx 50 is down 3.70 points, or 0.10%. Meanwhile, the FTSE 100 dropped 0.46%, and Germany’s DAX index dropped 0.05%.

In Asian markets, Japan’s Nikkei 225 is up 85.04 points, or 0.44%. China’s CSI 300 is down 0.20%.

In Australia, the S&P/ASX 200 is up 17.83 points, or 0.30%.

On the commodities markets, West Texas Intermediate crude oil is US$49.39 per barrel. Brent crude is US$51.66 per barrel.

Gold is trading for US$1,265.99 (AU$1,690.72) per troy ounce. Silver is US$17.47 (AU$23.34) per troy ounce.

The Aussie dollar is worth 74.88 US cents.

Let’s try this again

The Euro may be soaring, but it looks like low inflation is here to stay.

From The New York Times:

For years, low inflation across most of the advanced world was part of a vicious cycle featuring onerous debt burdens and low growth. Major central banks struggled to lift inflation to the 2 percent annual rate they aim for.

Finally, after an uptick in oil prices in 2016 and an abrupt shift in sentiment after Donald J. Trump’s election in November, it looked as if the world economy might be getting jolted out of that cycle. Some called it the Trumpflation effect. But it now seems that proclamations of victory were premature, and that the low-inflation world will be with us for at least a while longer.

That’s right, markets are starting to wake up to the fact that it takes more than an election and talks of an infrastructure package to create inflation.

We are still battling with downward pressures on prices, especially with commodity prices lowering. 

There are several things that could cause inflation to spike: commodity prices rising or the actual start of an infrastructure package, for example.

Yet there is another factor that could spike inflation. That is, an increase in geopolitical instability, or even the start of a conflict. After all, it wouldn’t be the first time governments finance war by printing money. Last week I wrote about this conflict, if you want to know more and how to protect your portfolio, you can read about it here.

Talking about conflicts, Prime Minister Malcolm Turnbull and US president Donald Trump will spend quite a bit of time talking about what to do with trigger-happy North Korea when they meet this week for the first time.

Last weekend, North Korea added fuel to the fire by firing another missile after president Trump said there could be a ‘major, major conflict’ between the nations.

It is yet unclear if Turnbull will bring up trade, even though it is of high concern for Australia.

From the Financial Review:

If Mr Trump ultimately imposed wide-ranging tariffs on steel imported from countries such as China, South Korea and Japan, Australian iron ore producers, including BHP Billiton and Rio Tinto, could be collateral damage.

You see, there are concerns with the US recently imposing a tariff on Canada’s softwood lumber coming into the US. All commodity currencies have been affected, with the New Zealand dollar plunging. It is now one of the world’s worst performing currencies.

Let’s hope things between Trump and Turnbull end better than the last time they spoke. At least this time, if things get heated, it won’t end with a ‘beep…beep…beep’.  

Saver’s taxed

The fact is, with weak inflation prospects and low commodity prices, the Australian dollar has been losing against the US dollar.

Deloitte is now expecting the budget deficit to be worse than forecasted, exactly $1.8 billion more. That is, 38.3 billion instead of 36.5 billion. Mainly due to promised infrastructure spending.  As Bloomberg reports:

The government had been constrained on infrastructure spending by efforts to bring a budget deficit under control and ensure it doesn’t preside over the loss of the nation’s AAA credit rating.

Yet the RBA is expected to leave the interest rate unchanged at 1.5% during their Reserve Bank Board Meeting tomorrow.

From Bloomberg:

Australia’s central bank was already highly unlikely to shift policy at Tuesday’s meeting. Now it has even less incentive to do so.

Policy makers will leave the benchmark interest rate unchanged at 1.5 per cent for a ninth month, money markets bet and economists predict, after data last week showed inflation creeping higher. A day later, the government moved to give itself leeway to fund major infrastructure projects by redefining its debt – potentially adding long-overdue fiscal stimulus to the economy.

Let’s bring on more debt. Cheap money is supposed to promote services and manufacturing industries, and move Australia away from so much reliance on mining. The thing is, it is also inflating property prices in Melbourne and Sydney.

But the ones that are suffering most are the savers.

While the cash rate is left at a low 1.5%, consumer price inflation is at 2.1%.

That is, prudent savers with money in the bank are not only suffering low returns on their investments, they are also getting taxed on it. They are losing money by keeping their money in the bank. They would be better off putting their money in risky property.

Meanwhile, the ones rewarded are the property investors, not only with negative gearing but with low interest rate on their debt.

If it ain’t broke, don’t fix it.

Rip up the rulebook

And speaking about housing… Sorry, we just can’t help ourselves.

The mainstream media is finally calling it. It could be the peak of the bubble.  

Business Insider reports:

The runaway Australian housing boom showed another sign of slowing with loans to investors climbing at the slowest pace in six months.

Home loans to landlords rose 0.6% in March from February, the weakest rate since September, according to data from the Reserve Bank of Australia Friday.

Annual growth at 7.1% was still the fastest in 13 months.

The monthly slowdown should be music to the ears of regulators that flagged financial stability risks and moved in to weed out risky lending. The data also comes a day after research firm CoreLogic said Sydney home values were set to post a fall in April for the first time since December 2015.

The Australian Financial Review reports:

So Sydney house prices have fallen in April for the first time on a month-on-month basis since December 2015, validating last week’s call that the easy-money fuelled Aussie housing boom is grinding to a halt.

According to CoreLogic’s daily hedonic index—the only measure that tracks price movements on a timely basis—home values across the nation’s largest metropolis have fallen 0.1 per cent in the first 27 days of April. This represents a dramatic deceleration in momentum given Sydney dwellings recorded total capital gains of 5 per cent over the March 2017 quarter alone.’

Auction clearance rates in Sydney and Melbourne are declining.

So in a cooling property market what are the so-called property ‘experts’ recommending?

Rip up the rulebook. That’s right, you heard me. The real estate rulebook no longer applies to Melbourne and Sydney.

As reported by the Australian Financial Review:

Red hot markets mean owners planning to sell their coveted properties can “rip up the real estate rulebook” and delay selling their house before finding another.

Veteran buyers’ agents claim the standard warnings about being stuck with two mortgages no longer apply in Melbourne and Sydney, where it has never been easier to sell well-priced property.

Forget the rules! Don’t just get one mortgage, get two! That is just reckless advice. Anything to keep the market going.

And the only thing this advice indicates is that there is not much steam left in this bubble.

Regards,
Selva