If you think Elon Musk is all over the place, watch what happens in the markets
THE world is going to get very tricky for sharemarket investors over the next few months, less so for property investors, including the vast bulk of homebuyers – those buying a property to live in.
The decision by the erratic mega-billionaire Elon Musk to walk away from his $US44bn ($65bn) takeover of Twitter, says zip about the broader sharemarket, even just in the US.
It says a lot about Musk – and indeed Twitter. Anyone offering that much to buy Twitter needed their head read. Good luck to anyone assigned to read Musk’s.
In this case, given the reality of both Twitter and Musk, it wasn’t a case of “buyer beware”, but seller.
There was no way you could trust Musk to actually proceed with the deal, unless and until, again, rather than the cheque arriving in the mail, the EFT hitting your bank account.
If only the outlook for the broader sharemarket would be quite so clear-cut.
A month or so back it was. The big problem in the US was inflation, pushing towards 10 per cent.
The Fed was going to get ultra “aggressive” with its official interest rate. A couple of Fed members – but not Fed head Jerome Powell – were talking of 75-point rate hikes at every meeting through to Christmas.
I wonder, incidentally, what local Aussie commentators, who have discovered a new description of our Reserve Bank’s 50-point hikes as “super-sized” would call a 75 pointer? Mega-super-sized?
Well, if interest rates were headed significantly higher in the US, if not necessarily quite that high and that fast, Wall St was headed sharply down.
That’s the way it works: higher rates make fixedinterest investments like bank deposits and bonds more attractive and shares less so.
So, in the first half of June the Dow promptly shed 10 per
cent. Our market dutifully followed by dropping 12 per cent. I remind you that our market is hostage, totally hostage, to Wall St.
I should also add, the Dow was dropping from a ridiculously high level, directly caused by the Fed’s zero interest rate and multi-trillion dollar money printing.
Just as our million-dollar houses are also a direct product of the RBA’s zero rate and the virtually “free money” of 2 per cent home loans.
But since mid-June the Dow has picked up 5 per cent, our market more like 4 per cent. Why? Inflation’s still a big problem in the US. The latest figures next week will confirm that.
The answer’s a mix of two growing perceptions – or maybe just wishful thinking – around Wall St.
The first is that the US might be heading for recession. If so, the Fed would stop hiking; indeed, it might even go back to cutting rates.
This feeds into a broader perception that US corporate earnings mightn’t fall that much; and share prices are a mix of multiples of earnings and how that compares with interest rates.
The two big economic numbers that are most closely watched – and reacted to by
Wall St – in this context are the monthly inflation ones, out next week, and the monthly jobless numbers.
The latest ones overnight Friday threw a curve-ball into the “economy slowing therefore fewer rate hikes” view. New jobs jumped by more than expected, the jobless rate stayed at just 3.6 per cent.
This will now merge with the inflation number to cause the next big market reaction – and then Wall St will have to trade, with great potential for volatility, through to the Fed meeting on July 26-27. And our market is hostage to all that.
My big point is that it is going to continue all through the year. We will see comment – and Wall St, and so our market – jump all over the place.
Is the US heading for serious sustained inflation? Or recession? Or stagflation? Will the Fed deliver mega-supersized rate hikes? Or back off?
And let’s not forget all those other “events’’ out there that are going to continue to bubble along and threaten explosions – most obviously Russia’s war on Ukraine and the flow-on impacts to oil, gas, coal and food prices.
Wall St and the Fed are crucial to the Australian sharemarket. Our local property is all about what the RBA does with its official rates.
What the RBA is likely to do is much more clear-cut. Most critically, it WON’T be following the Fed; and what happens to our local sharemarket is irrelevant to its thinking and its decisions.
It is all about inflation and the RBA catching up – while “noting” what is happening to jobs and wages and business conditions, as they are crucial to future inflation. This makes the quarterly inflation numbers the pivot of what the RBA does. The next lot come out at the end of the month.