Absent Coronavirus being a lot worse than we suspect or a Democrat winning the US Presidential election, there’s not a whole lot standing in the way of another equity rally this year. The US economy looks strong enough but not too strong so as to encourage the US central bank to remove stimulus. Europe looks to have found a bottom from an economic perspective, with Germany the weakest link and seriously considering embarking on fiscal spending for the first time in a very long time, which may encourage other European governments to embark on their own fiscal stimulus. Japan looks likely to embark on fiscal stimulus this year as the government needs to counter the effect of GST increases over the last few years.
Other issues to watch out for include a significant slip in Chinese growth (unlikely at this stage given government and central bank support), a re-escalation of US-China trade war (ie. further tariffs), a re-escalation of US-Iran tensions in the Middle East (ie. higher oil price), a significant and permanent spike in inflation (which would cause central banks to remove stimulus).
Closer to home, the Aussie economy is looking for a bottom, but it looks likely there’s further to go, with the bushfires and the Coronavirus significantly impacting tourism. The RBA likely has at least 1 more rate cut in them if not 2 before they get to their lower bound of 0.25%. They’ve recently made comments that they think quantitative easing is off the table, but it’s very premature to be making comments like that, unless they know something we don’t. That could be significant government fiscal pulse in the May budget, which looks unlikely, but is something the economy desperately needs. Outside of that, the only positives in the economy right now are a recovery in the housing market, largely in Sydney and Melbourne, and a falling Aussie dollar which is helping from an export perspective.
