The Daily Update - PAINTBRUSH - Why Australia Raises Concerns

The Daily Update - PAINTBRUSH - Why Australia Raises Concerns

Over the past few weeks we have been focussing on the “PAINTBRUSH” countries that we highlighted back in February 2014 as being particularly vulnerable. Recently we have highlighted the Polish Zloty as being particularly exposed, given the country’s high level of indebtedness.

The second letter in our acronym is ‘A’ for Australia. Unlike Poland, which is indisputably an emerging country with a GDP per capita of under USD 14,000, Australia is often considered to be a wealthy, advanced economy.

The Daily Update - Australia

Earlier this week, Moody’s downgraded the big four Australian banks’ ratings to Aa3 from Aa2 commenting that ‘elevated risks within the household sector heighten the sensitivity of Australian banks' credit profiles to an adverse shock, notwithstanding improvements in their capital and liquidity in recent years.  While Moody's does not anticipate a sharp housing downturn as a core scenario, the tail risk represented by increased household sector indebtedness becomes a material consideration in the context of the very high ratings assigned to Australian banks.’

The Daily Update - BOJ RBA UK China

Unless you want to focus on Hillary’s Gmail account and Donald’s ‘wall’ most of the headlines came from the Far East this morning, where amongst other news the Reserve Bank of Australia (RBA) and the Bank of Japan (BoJ) held meetings. The RBA, as widely expected, left the policy unchanged as did the BoJ but some interesting tinkering from the BoJ as to their inflation thoughts did emerge. They moved down their expectations once again, now looking for CPI to run at 1.5% in 2017 from the previous 1.7% and pushed out their 2% target rate to fiscal 2018, which still appears a little optimistic to us.

The Daily Update - Renewable energy / China / Australia

In a report published yesterday the International Energy Agency (IEA) said that last year renewable energy sources surpassed coal as the largest installed power capacity globally for the first time. In addition it sees growth in the sector significantly increasing over the next 5 years due to strong policies supporting the industry as well as massive cost reductions. In the latest report, Medium-Term Renewable Market, it sees renewables growing 13% between 2015 and 2021. During the same period solar production costs are due to fall by 25% and on shore wind generation by 15%. According to the report, China alone accounted for about 50% of the power generated by wind (two wind turbines were installed every hour!). Globally, half a million solar panels were installed every day. To put this into perspective, the expected growth will be equivalent to the combined power needs of the United States and the European Union combined. Globally, every hour 2.5 wind turbines and 30,000 solar panels will be installed.

The Daily Update - Unsustainable private and public debt levels

Last week we skeptically wrote of the “breakthrough” deal the IMF achieved for Greece with its international creditors; that is to pretend Greece can stave off bankruptcy and extend a further €10.3bn bailout. Bear in mind that with over €320bn public indebtedness and a required yield of 7% on Greek 10 year debt the new bailout funds are just about enough to cover 6 months of interest payments. So all those involved will be hoping for a similar deal again before November this year (and then again in May and November 2017…).

Wealthy Nations Daily Update - Australia

“A double dissolution occurs when both the Senate and the House of Representatives are shut down (dissolved), in order for a federal election to take place. A double dissolution election is different to regular elections, when only half the Senate seats are contested. In a double dissolution, the Governor-General dissolves both the Senate and the House of Representatives at the same time, meaning every seat in both chambers is contested. This is the only time that all senators stand for election at the same time (see Federal Elections). A double dissolution can only happen when there is a deadlock between the two houses of Parliament; it usually occurs at the request of the Prime Minister.” Australian Parliamentary Education Office Factsheet.

Wealthy Nations Daily Update - the Australian Drop Bear and Mexican Toro

Australian and Mexican equity and bond sentiments seem to suggest contrasting regional opinions.

If you visit Down-Under the locals may try to frighten you into believing in the ‘drop bear’ - a ferocious predatory koala that drops from above onto unsuspecting prey, be they a wombat or an expat. If you’re gullible you might follow their instructions to smear vegemite on your earlobes or urinate on your clothes to keep them at bay... The drop bear may be a hoax but Australians have a different sort of bear to be concerned about. Today’s headlines suggest that Australian stocks officially entered bear market territory, with the ASX200 at 4775, down over 20% from previous highs of 5997 in March 2015 (In fact they are down over 30% from 2007 highs so technically they haven’t stopped being in bearish territory for the best part of a decade). They join the growing club of global stock indices that are in bearish territory in terms of both 52-week highs and all-time highs including respectively: Euro Stoxx 50 (-27% / -46% Mar’00), French CAC (-22% / -36% Jun’00), German DAX (-27% Apr’15), Italy MIB (-31% / -66% Feb’00), Spain IBEX (-31% / -46% Dec’07), Brazil Ibovespa (-34% / -42% Mar’00), Hang Seng (-32% / -31% Dec’07) and of course Japan Nikkei (-25% / still down -60% from December 1989).

Wealthy Nations Daily Update - Black Monday

55 years ago today US imposed an embargo on Cuba -- 45 years ago BP discovered Oil in North Sea -- 28 years ago today it was the Black Monday stock crash in 1987.

On this day 28 years ago, on Black Monday as it is now known (or Black Tuesday in Australia and New Zealand due to the time zone difference)  the Dow Jones fell 508 points to close down 22.61% at 1,738.74. Of course it was not only the Dow Jones that was in a tail spin. By the end of the month Hong Kong was down 45.5%, Australia down 41.8%, Spain down 31%, with the FTSE down 26.45%. However by far the worst performing market was New Zealand, which was down 60% from its 1987 all-time high.

Wealthy Nations Daily Update - Coal / China Emissions Trading

In a recent report a Commodities Research Consultancy predicts that over the next 5 years China’s coal imports could fall dramatically. The independent research group Capital Economics believes that coal imports will fall to ‘virtually nothing’ by the end of this decade. In the report they say the three main factors for this fall are a slowing economy, a move to greener fuels and the government’s protection of the local mining industry. Coal imports in the first half of 2015 are already down 38 percent year on year, on track to decline by more than 80 million tons from 2014.  Added to this, as we have written before, China is on a huge renewable energy push. In 2014 electricity produced from hydro rose 5.7% and nuclear power 33.9%.

Wealthy Nations Daily Update - Australia

Malcolm Turnbull was sworn in today as Australia’s Prime Minister having won Monday’s Liberal Party leadership ballot, ousting Tony Abbott, to become Australia’s sixth Prime Minister in 8 years.  Interestingly, it was Abbott who ousted Turnbull from the opposition leadership position in 2009, by just one vote, when the Liberals were in opposition.   

A glance at the history suggests Australian politics have a history of being cut-throat; more recently Julia Gillard ousted of Kevin Rudd in 2010, only to then be ousted herself and replaced by Kevin Rudd again in 2013.  Further back, Robert Hawke was deposed as leader in 1991 by Paul Keating and John Gorton, after a tie in a confidence vote on his leadership exercised his casting vote against himself, in 1971.

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