The Australian share market performed well in June, with the All Ordinaries index closing the month 2.7% higher at 6,289.70 points. The positive result came as the Government's legislation to cut personal income tax rates surprisingly passed through the Senate.
The Australian Dollar continued its recent trend, falling by 2.0% in the month, with 1 Australian dollar currently buying 74.07 US cents. Once again, the Reserve Bank of Australia (RBA) board kept the official Cash Rate on hold at 1.50% per annum in the month of June.
Global share markets returns were mixed in June, with the United States' Dow Jones index falling by 0.5%, the London FTSE falling by 0.5%, the Japan Nikkei 225 gaining by 0.5% and the Hong Kong Hang Seng index falling by 5.0% in the month (as United States / China trade restrictions emerged once again).
The month of June marked the end of the Financial Year in Australia. From a share market perspective, the 2017/18 Financial Year was a positive one. The chart below shows share market returns for key global markets.
Source: Yahoo Finance
As noted above, the Australian share market gained 9.9% for the Financial Year (excluding dividends). However, the United States' share market once again provided superior returns, gaining by 13.05% over the last 12 months.
Australia's interest rate policy gained media attention in the month. This followed comments by former RBA Board member Warwick McKibbin, calling for the RBA to raise rates by at least 0.25% per annum. Mr McKibbin noted the increase was warranted to "prepare households for higher global rates".
It's nearly two years since the RBA last changed interest rates.
I have long held the view that low interest rates are here to stay for the foreseeable future. Most economists aren't predicting any increase to the RBA Cash Rate until at least 2020.
I even see the potential for a scenario whereby the RBA will cut the Cash Rate before it begins to increase it. This may be necessary if global interest rates start to rise and banks pass on increases to their funding costs to borrowers (which I know is challenging given the Banking Royal Commission).
From an economic perspective, Australia still continues to experience low wage growth and has a massive level of household debt (thanks mainly to a property price boom in the Eastern states over the last 5 years like that never seen before). In this context, increasing interest rates to "prepare for higher global rates" seems to be a risky approach to me.
While I accept that United States' interest rates are on the increase, and that bank funding costs will increase as a result of higher global funding costs, I doubt those heavily indebted households could absorb such an increase without a direct impact on their ability to maintain their current level of discretionary expenditure.
There is also notable evidence that domestic bank lending standards have been tightened (perhaps as a result of the Banking Royal Commission itself). As "cheap and available debt" has fuelled the growth in property values in my view over the last 5 years, any increase in mortgage rates (without corresponding increases in wages) risks creating a correction in property values.
While some would be delighted to see a correction in property values, remember to be careful what you wish for. After all, the genesis of the Global Financial Crisis was United States' house prices falling in value, and we all know what followed from there...
For what it's worth, the RBA board will meet again on Tuesday this week. For the reasons noted above, I would be shocked if there were any change in the Cash Rate.
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