Keeping that in mind, there are other factors in play in the Aussie market which could fuel September blues. The drought has hit agricultural stocks with rising grain prices putting pressure on businesses such as Nufarm and Inghams due to higher costs. Elders have also cited that retail earnings had been affected by “unseasonally dry conditions across many parts of Australia”; Ruralco have also put out a similar warning.
Both firms, however, have also stated that increased sheep and wool prices have offset those pressures.
Australian banks have been faced with increasing funding pressures due to the BBSW remaining persistently higher than the OIS rate. Despite the official Reserve Bank cash rate remaining on hold at 1.5%, the bank bill swap rate has risen more than 40 basis points in recent months (equivalent to 1.6 25bps rate hikes). For the past 10 years the gap between the official RBA cash rate and the BBSW has been close to 18bps, but it is now closer to 40bps. As we have previously noted
, rising funding costs pressure net interest margins and erode bank profits which could force lenders to raise rates. Since that article was published, the majority of smaller lenders have responded to tightening money markets and increased funding costs by raising rates by up to 40bps. Of the big four banks, all except NAB have raised their variable mortgage rates – Westpac by 0.14 percentage points, Commonwealth by 0.15, and ANZ by 0.16.
The big four have increased their rates enough to protect profits, but not enough to materially increase them. According to Bloomberg, Westpac will recover only about half of the 11bps drop reported in its Net Interest Margins during the three months to June 30. Moving forward, there is significant risk that further out-of-cycle rate rises could be in play as the BBSW-OIS spread may widen with the Federal Reserve continuing to hike rates in the US.
Australian banks also face other pressures. The housing market slide reduces investor demand for credit and significant regulatory risks remain post- the Royal Commission heading into the federal elections next year.
The out-of-cycle rate rises from Aussie banks put pressure on central bank stimulus as 80% of Australian households carry floating rate debt at record levels of 200% of disposable income. The increase in home loan rates and fall in the housing market will put pressure on consumer spending, thus challenging Australia’s growth outlook as household consumption accounts for 60% of GDP growth. The pressure on the consumer could trickle into stocks in the Consumer Discretionary sector, particularly retailers.
Finally, the political climate in Australia has potential to put pressure on Aussie equity markets as well. The Consumer Sentiment Index fell by 3% today and on Tuesday, Business Confidence hit a two-year low, likely affected by the leadership spill in late August and the ongoing policy paralysis that features heavily in Australian politics. Following the ousting of Malcolm Turnbull, the likelihood of a Labour government has significantly increased with equity market returns historically being an issue under a Labour government, according to Bloomberg data.