On Monday, global stock markets were crashing (until they weren’t).
Market volatility is now the new trend, reminiscent of 1987 crash and the 2000 tech wreck.
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I am Leon Gettler. My job is to review and monitor the week’s news in business, finance and economics. I bring it all to you, every week.
This is episode number 28 in our series for 2024 and today’s date is Friday August 9.
First, I’ll be talking to Paul Koopmans, the Australia New Zealand vice-president of Worldpay on the growth of digital wallets which are projected to grow by 45% in Australia of all e-commerce transactions by 2027 as cash and card use declines. The use of digital wallets at point of sale (POS) terminals is projected to double from 15% in 2023 to 30% of the POS market size of $789 billion in 2027.
And I will talk to AMP Capital chief economist Shane Oliver about the latest inflation figures.
But first, let’s talk to Paul Koopmans.
So what’s happening the news?
Fears of a US recession have gripped global markets, triggering a share market rout that prompted investors across Asia, Europe and North America to all unwind their positions – at the same time. The severe plunge raised questions over whether investors were facing a historic share market crash – similar to the global financial crisis or 1987’s Black Monday – or if it’s simply an overdue pull-back after a stellar period of strong returns. It’s been volatile for a few days. On Wednesday, U.S. stocks bounced back, and calm returnied to Wall Street after Japan’s market soared earlier Tuesday to claw back much of the losses from its worst day since 1987. The S&P 500 was rallying by 2.1% in afternoon trading and on track to break a brutal three-day losing streak. The volatile conditions erupted after the US Federal Reserve hinted after its 31 July meeting that interest rates would soon be cut, in what was initially seen as a stimulus for shares. But the gains quickly evaporated as investors reinterpreted the impending rate cuts as a sign the world’s biggest economy was faltering. Several pieces of economic data, including manufacturing, durable goods and – crucially – jobs and payroll data, raised questions over the health of the US economy, with the well-regarded “Sahm Rule” signalling a recession. This indicator, which is triggered when there is a rapid rise in the unemployment rate, has correctly identified every recession since the second world war. AMP chief economist Shane Oliver said “recession fears are now back with a vengeance, particularly in the US”. Nick Healy, a Sydney-based portfolio manager at Wilson Asset Management, said that the US data proved to be softer than expectations, triggering a strong market reaction. “It’s fair to classify it as an unwinding of positioning but my view is that it’s hard to extrapolate too strongly into the future from one month of economic data,” said Healy. After a weekend break to digest the news, a rout took hold in Asian, and Australian markets, on Monday, and swept through European and American markets later in the day. Wall Street’s gauge of fear, the CBOE Volatility Index, shot up above 65; levels not recorded since the pandemic, and reminiscent of the GFC, before settling. The S&P 500 lost 3% on Monday, while the tech-focused Nasdaq shed 3.43%. While both figures were remarkable, they were more modest than what the futures market initially pointed to, providing some relief to traders and raising hopes the sell off wouldn’t turn into a full-blown meltdown. Even after the losses, the benchmark S&P 500 index is still up more than 9% since January, as is the Nasdaq. Shares, stock markets and indices that had risen the most tended to fall the furthest. Chip maker Nvidia, which had led a period of robust returns for the tech sector, was down by as much as 15% at one point on Monday, before halving its losses, while bitcoin also fell sharply. Australia’s share market suffered its worst day since the onset of the pandemic, erasing more than 100bn in value from local stocks in a single trading session. But it was Japan’s Nikkei which came under the most extreme pressure, plunging by 12% on Monday before rebounding strongly on Tuesday. Investors have been concerned about the state of the Japanese economy and the recent effects of a strengthening yen, which has unravelled the so-called “carry trade”, in which investors borrow cheaply in yen and buy higher-yielding assets including the US dollar. Analysts had warned that the yen carry trade was unwinding, triggering margin calls and forced selling. Online trading firm IG said that it suspected the frenzied market action in Japan was the “final act of cleansing of long positions in the Japan trade”, referring to investors who were caught up in the yen-carry trade. Some safe haven assets, such as bonds, proved to be among the few hiding spots from the turmoil, with the sharp moves challenging all the sure bets of recent months. That upbeat sentiment had been underpinned by optimism about AI technologies and the wider tech sector, along with expectations inflation would cool, job markets remain robust and economies emerge from the inflationary period intact. While it’s too early to tell whether the selling pressure will abate, at the very least the sharp falls are a warning shot. The global recession concerns of recent years have been tied to a fear that cost-of-living pressures will eventually depress spending to such an extent that economies will shift into reverse. One “canary in the coalmine” investors look to is American online furniture and home goods company Wayfair, which warned on Thursday that customers were very cautious after recording a near 25% fall from peak spending levels recorded three years ago. “This mirrors the magnitude of the peak-to-trough correction the home furnishing space experienced during the great financial crisis,” Wayfair chief executive Niraj Shah said on the earnings call. While those discretionary spending figures support a case for an ensuing bear market, investors also have an eye on the upcoming US election and associated spending initiatives, which could act as another stimulus for shares. Traders and analysts struggled to explain the extremity of Monday’s sell-off. “There must be some forced or technical selling as the fundamentals did not change by 11-12% in one weekend,” said Kiran Ganesh, multi-asset strategist at UBS. He added that he saw a sharp sell-off as a buying opportunity. Others, including Nicholas Smith, Japan strategist at CLSA, pointed to the exaggerated impact of algorithmic trading programs, which may have specifically responded to the recent sharp upward move in the yen. “It does look like they are correlated with the yen,” Smith said. “After all the excitement about the prospects of AI, it now looks like AI may have got us into this mess.”
Elon Musk’s social media platform, X, on Tuesday sued a global advertising alliance and several major companies, including Unilever, Mars and CVS Health, accusing them of unlawfully conspiring to shun the social network and intentionally causing it to lose revenue. The company formerly known as Twitter accused the defendants of a “massive advertiser boycott”. X filed the lawsuit in federal court in Texas on Tuesday against the World Federation of Advertisers as well as the companies individually. “We tried peace for 2 years, now it is war,” Musk tweeted on Tuesday. The lawsuit said advertisers, acting through a World Federation of Advertisers initiative called Global Alliance for Responsible Media, collectively and maliciously withheld “billions of dollars in advertising revenue” from X. The company said they acted against their own economic self-interests in a conspiracy against the platform that violated US antitrust law. In a statement on Tuesday about the lawsuit, X’s chief executive, Linda Yaccarino, said: “People are hurt when the marketplace of ideas is constricted. No small group of people should monopolize what gets monetized.” “The consequence – perhaps the intent – of this boycott was to seek to deprive X’s users, be they sports fans, gamers, journalists, activists, parents or political and corporate leaders, of the Global Town Square,” she wrote. Maybe when it goes to trial, Musk can explain to the judge why he told advertisers to “go f… yourselves.”
Australia’s central bank kept interest rates at a 12-year high and all-but ruled out a rate cut in the next six months, splitting with global counterparts as it waits for inflation to abate. The Reserve Bank held its cash rate at 4.35% for a sixth straight meeting on Tuesday and lifted its forecasts for inflation and economic growth. In her press conference after the policy decision, Governor Michele Bullock said there’s still a risk that inflation will take too long to return to target and said it’s too early to be talking about imminent easing. “The market path at the moment is pricing in interest rate reductions by the end of this year,” the governor said. “The board’s feeling is that in the near term, by the end of this year, in the next six months, given what the board knows at the moment and given where forecasts are — that doesn’t align with their thinking about interest rate reductions.” Money markets had pared bets on a November rate cut while fully pricing one for December.
The nation’s struggle to build enough homes for a growing population will be probed by a new Productivity Commission inquiry. Government red tape slowing the approval and construction of homes, workforce challenges and innovation by home builders will be investigated by the federal government’s independent economic adviser. The inquiry comes amid grave doubts in the housing industry that the Albanese government will achieve its joint goal with the states and territories for 1.2 million homes to be built over the next five years. After a building boom during COVID-19 fuelled by low interest rates and government stimulus payments, total dwelling approvals plunged to 163,320 in the year ended June 30, the weakest result since 2011-12. It’s well short of the 240,000 annual target required to meet the medium-term goal of governments. A perfect storm has constrained the building of homes. Suppressing supply are higher interest rates for developers, soaring building material costs, higher wages for construction workers, elevated land prices and slow approval processes by state and local government agencies. At the same time, demand for homes has surged due to more than 500,000 net overseas arrivals and fewer people living in each home on average due to them wanting more space to work from home and other lifestyle choices. Expensive housing construction costs and rents have contributed to elevated inflation in the past two years. Productivity in the construction industry has been stagnant over the past two decades, making costs in this industry more difficult to contain. The Productivity Commission is commencing self-initiated research into productivity in Australia’s housing construction sector. It will investigate issues that might be weighing on productivity growth in the sector, such as barriers to the adoption of innovation and scaling up, government regulation at the local, state and federal level, and characteristics of the construction workforce. Sydney-based housing developer Mark Bainey of Capio Property Group said the No.1 problem facing home builders was a shortage of skilled workers such as carpenters, plumbers and electricians. “The key thing holding back construction at the moment is the supply of skilled labour,” Mr Bainey said. “We have a lot of unskilled labour but not enough skilled labour. Nobody wants to study a trade or be a tradie. The migration rules are not bringing in enough skilled migrants – they’re bringing in yoga teachers but not enough tradies.” A common complaint from builders is that tradies are working in higher-paid jobs on government-funded infrastructure projects. Housing Industry Association chief economist Tim Reardon said government red tape was making home building more expensive and causing a decline in the sector’s productivity. This included laborious state and local agency planning approval processes, higher taxes on foreign investors, seven-star sustainable building rules, tougher carbon abatement regulations for new homes and a higher level of wheelchair accessibility, he said.
Penfolds owner Treasury Wine Estates will sell its more affordable wine brands, including Wolf Blass, Lindeman’s, Yellowglen and Blossom Hill, as that segment suffers from an exodus of budget-strapped drinkers. The company announced on Tuesday that as part of a structural six-month review, it will exit its commercial wine brands, which sell for around $10 a bottle. The ensuing $354 million impairment, related to goodwill and their carrying value, is equivalent to $290 million after tax. Treasury signalled there may be more to come from its structural review, with an outline of its future operating model to be made at its full-year result on August 15. The company has been assessing the merits of completely demerging its luxury wine business from its mid-priced wine unit. Consumers globally are shifting to higher-priced, higher-quality bottles of wine, but are consuming less overall.
The nation’s most influential corporate governance adviser, Ownership Matters boss Dean Paatsch, is demanding to view hidden court documents linked to the Super Retail Group workplace scandal and legal battle, arguing shareholders should know the true nature of the legal and financial threats facing the retailer as well as any governance deficiencies on the board led by chair Sally Pitkin. Mr Paatsch and Ownership Matters made a submission to the Federal Court to view the statement of claim made by sacked Super Retail chief legal officer Rebecca Farrell, which was kept confidential in court last week. Justice John Halley spoke of a document request from an “investor consultancy organisation”. Mr Paatsch, one of the founders of corporate governance advisory in Australia, has also aimed his guns at the Federal Court’s recent rule change denying non-parties public access to crucial court documents such as the statement of claim until there is a directions hearing – which can take months. Mr Paatsch described the ruling as “curious”, saying courts were “running a protection racket” for companies and the “hurt feelings” of directors that flies in the face of the fundamental concept of “open justice”. Mr Paatsch, who has the ears of some of the nation’s largest super funds and fund managers, is closely following the court case and scandal now gripping Super Retail, flowing from claims from whistleblowers including Ms Farrel about allegedly improper workplace behaviours, bullying, harassment – and that chief executive Anthony Heraghty was having a secret affair with his then head of human resources, Jane Kelly. Alongside the media, Ownership Matters made a submission to view Ms Farrell’s statement of claim, where it is believed she details the events leading to the scandal, the inner workings of Super Retail’s whistleblower policy and any corporate governance claims or failings concerning the board, chair Ms Pitkin and the head of the risk committee, Ms Chaplain.
Prime Minister Anthony Albanese is facing growing calls for a royal commission into the CFMEU, with the Business Council of Australia warning an administrator is “wholly inadequate” to investigate the union’s misconduct. Former judge and the recently departed commissioner of Victoria’s anti-corruption watchdog, Robert Redlich, also warned that watchdogs were limited in their powers and federal and state Labor governments must do more to clean up CFMEU corruption. The Civil Contractors Federation, the peak body for civil construction, is backing a royal commission. It will launch a campaign on Monday for members to come forward, amid fears that confidentiality and retribution are preventing known whistleblowers from speaking out. The Fair Work Commission, tasked by the Albanese government, on Friday made an application to the Federal Court to put the CFMEU’s construction branches under the control of independent administrators. NSW Premier Chris Minns said his government would on Monday file an application in the Industrial Court to appoint an administrator of the CFMEU’s NSW branch of the construction and general division. that However, there have been reports that Fair Work was struggling to get the evidence it needs to put the CFMEU into administration because it is not legally allowed to access critical police information or investigate the alleged criminal identities that have infiltrated union ranks. The BCA said the advice from the organisation’s general counsel backed concerns that a CFMEU administrator would not have the power to properly investigate the union, even if it is successfully appointed by the court.
And it’s the profit reporting season. Operating earnings at EnergyAustralia, the country’s third-biggest electricity and gas retailer, reached $HK611 million ($122 million) in the six months ended June 30, bouncing back from a loss of $HK590 million in the year-earlier half. Credit Corp posted an underlying profit of $81.2 million in FY24, down from $91.3 million a year earlier while revenue rose 10% to $519.6 million. Net profit after tax took an even bigger hit, slumping 44% to $50.7 million largely due to impairments in its US loan book.
And that’s it for this week. And next week, I’ll be talking to Nexia Australia’s corporate advisory partner Brent Goldman about the latest M&A trends, which overseas countries are the largest acquirers of Australian companies and M&A trends looking forward.
And I will talk to economist Saul Eslake about Australia’s inflation outlook, its economy and the RBA.
For the most exclusive access to leading economists and business leaders from around the world, subscribe to Talking Business from my website leongettler.com.
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Wishing you all a safe and healthy week. And looking forward to bringing you Talking Business next week
