The S&P/ASX 200 (ASX: XJO) finished the week down 0.8% despite the rough start on Monday while US stock markets shook off the volatility to post positive results for the week.
Here are my key takeaways from the five days.
IMF issues property warning
The International Monetary Fund (IMF) is the latest group to flag concerns for the Australian economy. The international agency flagged the growing risk in Australia’s property market, which has the potential to be systemic.
Prices are expected to rise another 20% in 2021 as cheap debt and a lack of supply force the market higher.
The IMF also flagged a ‘reckoning’ for zombie companies, but particularly small businesses, once pandemic supports are withdrawn. They expect a significant jump in insolvencies and a difficult economic recovery.
Interest rates lower for longer?
Rates hikes appear to be the talk of the week, with no less than three central banks confirming their intentions to move higher. Norway, the UK and the US look set to be among the first to raise rates as they seek to stave off the threat of inflation.
The big question is whether this is another misstep in a long history of ‘too soon’ moves by central banks.
The pandemic is making it incredibly difficult to obtain a true read on the economy, with everything from inflation to unemployment clouded by global restrictions and supply chain issues.
There appears just as much risk of deflation as there is sustained inflation given the state of the economy before the pandemic. Perhaps this is why the likes of Brookfield and APA Group (ASX: APA) are willing to pay huge multiples for traditional bond proxy assets like AusNet Services Ltd (ASX: AST).
Spending up and borrowing big to buy long-term, slow-growing assets suggests they expect rates to remain lower for longer. The Japanese are well aware of this environment having dealt with it since the 1970s.