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War and Peace

While the US – China trade disputes rattled global markets, Australia managed to buck the trend in a remarkable month of May.

Clearly everyone had underestimated the seriousness of the US position on China. While they could pull out a deal in an attempt to save face, lines have been crossed and the language used shows an ideological split. China’s leaders will not be prepared to look weak, even if the US has some completely reasonable gripes. Yet Trump does have the ability to fold and claim success, regardless of the actual outcome and China would be willing to give Trump enough to claim some gain for the 2020 elections. The reality is that we do not know, but it was not long ago that investors expected a deal to be done and we suggested that was a risk. Now there is talk of a cold war, but who knows next month.

Despite it all the Australian market was up. The shock election result, none of the expected policy changes, APRA loosening up lending, the Liberals will help new homeowners get bigger loans, tax refunds and the RBA expects to cut rates. Tony Abbott is gone and their is peace in Canberra tonight. The iron ore price remains very high, despite China slowing as Vale still has many mines closed due to the disaster earlier this year. Throw in some toppy valuations and the lucky country watched it all go by.

Some of the policies do reduce the risk of a major fall in the housing market (they are intended to stabilise the property market) without a big pickup in unemployment, but after the initial boost from all of the above, we seem stuck in the same rut with excessive household debt and low wages growth. If the Reserve bank uses up the rest of the rate cuts, there is only own quantitative easing (not sure how much they can push long term rates down) or some other unconventional policies left.

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