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ASX 200 (XJO) tipped to rise – Australia enters first recession since 1991

The S&P/ASX 200 (ASX: XJO) is set to follow a positive lead from overseas markets and open higher on Thursday. Here’s what’s making headlines.

Markets look to the future

The ASX 200 staged a remarkable recovery on Wednesday, adding 1.8% even as we received confirmation that the economy had contracted by 7% in the June quarter.

The rally was broad-based with industrials and materials improving on the back of stronger Chinese manufacturing activity; BHP Group Ltd (ASX: BHP) finished another 2.7% higher.

The positive news from AMP Limited (ASX: AMP) continued with the new Chairwoman announcing that the company had received unsolicited approaches for its superannuation platform division, AMP North, with rumours private equity giant KKR is the interested party. The AMP share price firmed 4.8% after the board effectively confirmed that everything was up for sale as they seek to realise the latent value of the company’s quality portfolio of assets.

This is in stark contrast to IOOF Holdings Limited (ASX: IFL), down 23%, befuddling decision to acquire MLC Wealth in what I suggest is a positive for National Australia Bank Ltd (ASX: NAB) shareholders.

Australia’s first recession since 1991

The Australian economy contracted 7% in the June quarter, officially confirming what has been known since April; we have entered a technical recession. The trust placed in ‘expert’ economists continues to confound me with each of the major banks predicting a 5.5-6.5% contraction just yesterday.

If there ever was an opportunity to add an ‘asterisk’ to an economic announcement it is this one, with governments effectively pulling the pin on the economy to protect the health of the population.

The highlight was a 1% boost from our trade surplus as imports were slowed due to travel restrictions, but clearly insufficient to offset the 12% fall in household consumption and 18% in services. Government spending offered little support, adding 0.6% for the June quarter. The result taking the annual economic growth figure down 6.3%.

Once again, Australia has been protected by its relationship with China, with comparative quarterly growth contractions around the world much weaker, including 31% in the US, 20% in the UK, and 12% in Europe.

Media headlines will point to the huge increase in the savings rate to 20% from 6%, yet anyone locked down in Melbourne will attest to the inability to spend money on anything but Kogan.com Ltd (ASX: KGN) or Woolworths Group Ltd (ASX: WOW).

Going global

The US market rally broadened on Wednesday, with the least popular ‘value’ companies taking the mantle from the technology sector for one of the few times this year. The result was a 1.6% increase in the Dow Jones and just 1% from the Nasdaq, whilst the Euro Stoxx 100 had its strongest day in several weeks, adding 1.8%.

The financial and construction sectors improved on both sides of the Atlantic as housing starts in the UK improved and Treasury Secretary Mnuchin indicated he is willing to discuss another round of stimulus measures for the struggling US economy; this despite limited lockdowns across the country. Coca-Cola Co. (NYSE: KO) and Dow Inc. (ASX: DOW) both added over 4%.

The growing global pressure on China continues with India banning the use of a number of Tencent and Alibaba-owned apps following another flare up on their border with the Chinese. This stands out as one of the biggest issues for the remainder of 2020 and beyond.

This article was written by Drew Meredith, Financial Adviser and Director of Wattle Partners. To get in contact with Drew, click here to visit the Wattle Partners website.

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Disclosure: At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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