Looking back at 2018 highlights
As 2018 came to an end, we look back at key macro events which shaped financial markets.
2018 saw Australia change its Prime Minister without an election… again.
In August 2018, after facing challenges to his leadership by Peter Dutton, then Prime Minister Malcolm Turnbull resigned. With the Australian Prime Minister position vacant, three candidates – Peter Dutton, Scott Morrison and Julie Bishop – contested for the top job. In the end Scott Morrison was elected by the party room as Australia’s 30th Prime Minister. With ongoing instability and in-fighting within the governing Liberal Party, the Federal election in 2019 should be interesting viewing.
Reserve Bank of Australia keeps rates on hold.
Throughout 2018, the RBA kept the cash rate on hold at 1.5% and as of its final meeting of 2018, the RBA has kept the official cash rate on hold for the longest ever period – currently at 28 months (and counting). Some have suggested the current RBA Governor Philip Lowe may see out his term without moving rates once.
Ratings agencies upgrades Australia’s credit rating.
S&P Global Ratings raised Australia’s sovereign rating outlook up to ‘stable’ from ‘negative’ on expectations that the federal budget balance will return to surplus by early 2020s and affirmed Australia’s credit rating at ‘AAA’ and the outlook was revised. Australia is now only one of 11 nations globally with a AAA credit rating. S&P has had a negative rating outlook on Australia since July 2016, and a AAA rating since February 2003.
Royal commission into misconduct in the Banking, Superannuation and Financial Services Industry commenced and produced its interim report.
The final report is due in February 2019 (if an extension is not sought). The royal commission was initiated to investigate the misconduct in the Banking, Superannuation and Financial Services Industry commenced on March 13, 2018 led by former High Court judge Kenneth Hayne. The royal commission investigated suspect financial advisory, dubious consumer credit approvals, misuse of retirement savings, and other actions that “fall below community standards and expectations”.
Australian Prime Minister Scott Morrison announced a Royal Commission into the aged care sector for 2019.
The Royal Commission will focus on the quality of care provided in residential and home aged care to senior Australians. The PM pointed out that it is approximately twelve months since the shocking treatment of elderly at South Australia’s Oakden aged care facility was revealed. Since then, authorities have closed one aged care centre per month. Further, in 2017, the Government commissioned the Review of National Aged Care Quality Regulatory Processes and legislated for new Aged Care Quality Standards, the first upgrade of standards in 20 years, and introduced a Bill to create the Aged Care Quality and Safety Commission.
Amazon changes the rules for Australian consumers.
During the year, Amazon announced that it will not allow Australian consumers purchasing from its global sites as a result of new GST rules from 1 July where online retailers such as Amazon will be regulated to apply 10% GST on products purchased from its global sites and shipped to Australia. Instead, the Australian shopper will now be redirected to Amazon’s Australian site, which will obviously have a relatively limited product range. Previously, GST was exempt for purchases under $1,000. The increased administrative cost to monitor GST from its international sites appears to be the main driver behind the move, although eBay has announced that it is upgrading its global systems to comply with the new rules. It is estimated Amazon makes between $500 – 700m in revenue per annum from Australian consumers via this channel
US-China trade tension was a major talking point in 2018
Whilst the U.S. President Donald Trump and President Xi of China agreed on a trade truce for 90 days at a recent meeting in Argentina, where both leaders were attending the G20 summit, 2018 saw much volatility in markets as a result of concerns in what trade tariffs meant for various asset classes. Whilst there were very little details on a long-term sustainable solution, both parties agreed to the following in the short term:
- The U.S. agreed to postpone any further tariffs on Chinese goods, maintaining it on $200bn goods and at 10% levels.
- Immediate resumption of trade negotiations, including addressing key U.S. concerns on technology transfer, intellectual property protection, cyber theft and non-trade barriers.
- China will purchase substantial amounts of agriculture, energy, industrial and other products from the U.S.
US President Trump meets with North Korean leader Kim Jong Un
Much of 2018 saw geopolitical tensions between the U.S. and North Korea escalate and de-escalate after a ‘peace’ agreement was agreed between the two nations. Indeed, markets saw the ups-and-downs from the perception of heighten and lowered tensions between the countries. From the document, which was signed by the U.S President and North Korean leader, the key highlight is the four-point objective:
- The United States and North Korea commit to establish new relations in accordance with the desire of the peoples of the two countries for peace and prosperity.
- The United States and North Korea will join their efforts to build a lasting and stable peace regime on the Korean Peninsula.
- Reaffirming the April 27, 2018 Panmunjom Declaration, North Korea commits to work toward complete denuclearization of the Korean Peninsula.
- The United States and North Korea commit to recovering POW/MIA remains, including the immediate repatriation of those already identified.
Risk in the ‘manner’ of Brexit from the European Union (EU) continues to weigh on global growth and markets.
British PM Theresa May continues to negotiate the UK’s exit from the European Union whilst seeking support in her own parliament as to the terms of the departure. We have commented previously that, depending on the manner of the UK’s transition out of the EU, we see both UK and global growth being impacted. The OECD is currently projecting UK growth to increase, “slightly in 2019 before slowing in 2020, on the assumption that there is a smooth exit from the European Union. Some Brexit-related uncertainties will remain until there is clarity about future trading arrangements. An expansionary fiscal stance and a slow recovery in exports are expected to support growth, while the monetary stimulus will be gradually withdrawn. Inflation is projected to converge to 2% by the end of 2020”.
2018 saw concern over risks in a slowing Chinese economy.
No doubt, growth in China moderated throughout 2018, as a result of:
- tighter regulatory conditions on shadow banks (which have slowed financing);
- more demanding approval process for local government investment;
- new U.S. tariffs on Chinese exports to the U.S.;
- narrowing of the interest rate gap with the U.S. These combined have weighed on the renminbi exchange rate, equity prices and industrial production.
Fresh sanctions were placed against Russia in 2018.
The sanctions targeted 17 Russian government officials, as well as seven Russian oligarchs. At the time, according to U.S. Treasury Secretary Steve Mnuchin, “the Russian government engages in a range of malign activity around the globe, including continuing to occupy Crimea and instigate violence in eastern Ukraine, supplying the Assad regime with material and weaponry as they bomb their own civilians, attempting to subvert Western democracies”. The fresh sanctions imposed created volatility in commodity prices as Russian companies seek to divert their supply to ‘friendly’ trading partners and minimize the impact on their supply chains (and indeed these companies have already sought ~US$1.6bn from the Russian government to do so).
Oil prices on the decline
Especially in late 2018, oil prices collapsed with prices dropping from above US$70/bbl to just above US$50/bbl. Recent OPEC talks came up short and without a deal to reduce supply. The sticking point on the proposal of cutting 1 million barrels a day was Russia’s refusal to a large output cut. On the other hand, Saudi Arabia is unwilling to shoulder all the heavy lifting and demanding equal output curbs from all members.
It was a disappointing end to the year with the market wiping out all its gains over 2017 and 2018.
Lets see what 2019 brings…