What we liked
- The ASX 200 Index snapped a 5 day losing streak on Wednesday to close just above the 6000 mark following an upbeat assessment of the global economy by the IMF supported by sweeping tax cuts. It came despite the US Government shutdown which markets largely ignored. Some of the stocks that outperformed this week were Resmed (RMD), Treasury Wine Estates (TWE), Nine Entertainment Holdings (NEC), Orocobre (ORE) and Whitehaven Coal (WHC).
- Treasurer Scott Morrison says Australia needs to act swiftly and cut its corporate tax rate to offset the damage caused by the US tax cuts. An analysis shows GDP could fall by as much as 1% if taxes aren’t reduced. The Turnbull Government will now ramp up its push for deeper company tax cuts over the coming weeks to convince the Senate that this needs to be done. When corporate taxes are reduced there is more free cash available for businesses to invest and expand. That means more jobs and higher wages. The benefits are widespread. Qantas CEO Alan Joyce has details plans on how to reinvest and create new jobs if the tax rate is lowered to 25%.
- The Australian dollar has breached the US80c mark extending its bullish run that has seen it climb US5c in a little over a month. It hit as high as US80.2c after US investors became concerned over a potential US government shutdown should policymakers be unable to agree on a long-term funding plan. To add to it, a rise in the price of key commodities such as oil, gold and metals has also boosted the Aussie dollar.
- IMF has raised their global growth forecasts and predicts global growth to hit 3.9% this year and in 2019 supported by the US tax cuts. That’s 0.2% up from its last update in October. Sweeping US tax cuts were likely to boost investment in the US and help its main trading partners. But US growth would start to moderate after 2022 as tax cuts began to subside and temporary spending incentives recede. The US economy is now expected to expand by 2.7% in 2018 well above the 2.3% in October. US growth was tipped to slow to 2.5% in 2019.
- Google is launching an Artificial Intelligence centre in France. The company is adding a 6,000 square metre office where thousands of employees will be employed. The new research centre will be dedicated to artificial intelligence. Why France? Because France is known to have some of the best universities in the world. Details are still a bit sketchy but it is clear that Paris will become a key city for AI technology and talent. But it’s not just Google that is in Paris, Facebook has an AI centre in Paris as well. It too will open a research centre in Paris devoted to artificial intelligence.
- Australia along with 10 other countries have signed the Trans Pacific Partnership. The new deal will eliminate more than 98% of tariffs in a free-trade zone. The deal is a big plus for Australia and will help boost exports and drive economic growth. Canada walked away from the deal in November, but has since had several issues resolved. The combined GDP of the 11 countries is $13.7 trillion. President Trump pulled the US out of the TPP deal last year. It shows the willingness of countries across Asia and the Americas to move on regardless of the US. Trump is more inclined to do one on one deals with countries but TPP members like Japan and Vietnam will be less inclined to do one on one deals with the US now.
What we didn’t like
- Private school education fees are skyrocketing and in some cases the rise in private school fees has been double the rate of inflation and wages. There has been a 0.7%-4.9% increase for leading private schools compared to the inflation rate of 1.8%. Trinity Grammar in Melbourne had a fee increase of 5% for a year 12 student to $32,280 per year. Sydney was the most expensive city in Australia to send a child to private school. Brisbane was the cheapest.
- The US Senate Democrats pushed the Government into shutdown on the first anniversary of Donald Trump’s inauguration. The failure to reach a deal was a huge blow to the Government. This is the first US Government shutdown since 2013. Later on in the week, US senators voted to move forward on legislation that would reopen the federal government until February 8. This ends a three-day standoff between Democrats and Republicans. Senator Chuck Schumer said Democrats would support the bill if Republicans address a programme that protects young immigrants from deportation. The Government shutdown is largely being ignored by markets.
- US bond yields have hit multi-year highs this week and are flashing warning signs. The yield on the 2-year US Treasury bond hit 2.07% and is now higher than most stock dividend on the S&P 500 stock index. It’s the first time it has crossed over since 2008. It’s quite an important crossing. Investors can now receive a slightly higher yield from Government bonds than from equities, taking on a lot less risk. The yield on the benchmark 10-year Treasury note was higher at around 2.661% and the yield on the 30-year Treasury bond was higher at 2.927%. Bond yields move inversely to prices. It’s usually a negative for the US equity market as the prices of bonds and stocks move in the opposite directions. When stocks go up in value, bonds go down. This occurs because stocks do well when the economy is booming. Investors want to take advantage of higher stock prices, so they sell their bonds and buy stocks. When the economy slows, investors buy regular interest payments guaranteed by bonds.