Each month we provide information on the latest market updates highlighting national and international events and current market trends. Reports from the last few months can be found below.
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Market Commentary November 2018
The geopolitical concerns outweighed relatively solid fundamental data in November, with most major global stock markets unable to recover the sizeable declines registered in October. Conversely, Australian and Global bonds recorded positive returns aided by falling yields. This was largely attributable to the continued risk-off sentiment, as well as comments from the US Federal Reserve’s (Fed) Chair that rates are now “just below” the neutral level, suggesting fewer future rate rises.
Geopolitical concerns between the US and China continued to play out with a meeting between President Xi and President Trump at the G20 summit showing some inclination to de-escalate the tensions with a 90-day pause on any tariff increases. However, there are still significant points of contention between the two countries which are increasing investor concerns of a potential slowdown in economic growth. Brexit negotiations showed progress with a withdrawal agreement approved between the UK and the European Union (EU), however, the agreement still needs to be submitted to the UK Parliament where there is considerable scepticism the deal will be passed. In Italy, recent discussions between the Italian government and the EU over the previously submitted Italian budget plan appear to be more constructive and suggest the possibility of a compromise.
In the US, the S&P 500 rose by 2.0%, partially recovering October’s falls following a strong third-quarter earnings season in which earnings per share (EPS) grew in excess of 25% year-on-year. Further gains were constrained by poor sentiment and investor sensitivity to future earnings guidance. US core inflation declined to 2.1% year-on-year (headline inflation 2.5%), highlighting a lack of meaningful acceleration in the underlying pace of inflation.
In Australia, the Reserve Bank of Australia (RBA) kept rates on hold for the 25th consecutive meeting at 1.50%, sighting low and stable inflation and an expectation that this low rate will gradually produce reduced unemployment and increase inflation to its 2-3% target band. In contrast to global markets, the ASX 300 fell 2.2% over the month. The decline was driven by the Energy sector (-10.7%) following a significant decline in the oil price and increased regulatory scrutiny, and the Materials sector (-4.7%) where concerns around slowing Chinese growth weighed. The IT (1.0%) and Financials (1.4%) sectors were the strongest performing, retracting some of their prior losses. Australian small caps stocks (-0.4%) outperformed, while large caps (-1.6%) under-performed.
From a currency perspective, the Australian dollar appreciated against major currencies during November, which were likely motivated by the RBA’s updated growth forecasts and comments. The AUD rose against the USD (3.0%), Yen (3.7%), Pound (3.2%) and the Euro (3.1%). In aggregate, these moves resulted in unhedged equities (-1.8%) under-performing hedged equities (1.3%).
US yields saw a similar pattern to October, with the US 10-year Treasury yield initially rising early (peaked at 3.23%) but rallying down to 3.01% by the end of November, primarily on concerns relating to global growth and the impact of failing oil prices on inflation. Yields also fell in other developed markets including Australia, the UK, Europe, and Japan. Italian 10-years yields continued their recent volatility, falling to 3.21% on the back of the constructive budget discussion.
Source: FactSet / JANA
Source: FactSet / JANA -
Market Commentary October 2018
Market volatility returned in October, with all major equity markets falling over the month. In a reversal of multi-year trend, value stocks outperformed relative to growth stocks. Despite the risk-off sentiment, global bonds delivered a negative return mostly due to rising long-term US yields as investors increasingly focused on the US Federal Reserve’s (Fed) monetary policy normalisation path.
Chief among the geopolitical concerns is the ongoing US-China trade war, and consequently concerns for Chinese growth. China recorded GDP growth of 6.5% (year on year) for the third quarter, which was slightly lower than consensus expectations. In response to slowing growth, the People’s Bank of China (PBoC) cut its reserve requirement ratio yet again in October in an attempt to stimulate bank lending. In Europe, the European Central Bank (ECB) maintained its guidance that it will cease it quantitative easing programme by the end of 2018 calendar year, despite acknowledging somewhat weaker recent economic data. In Italy, the previously submitted budget plan to the European Commission, that would see the 2019 Italian deficit rise to 2.4% of GDP, was rejected and revisions asked to be made to reach fiscal targets. Moody’s downgraded Italy’s sovereign debt by one notch, to just retain its investment grade status. In terms of Brexit, a summit between the European Union and the UK took place, although setbacks over the Irish boarder led to stalled negotiations.
In the US, the S&P 500 fell by 6.8% despite most S&P 500 companies reporting third quarter earnings-per-share growth above estimates. However, future earnings guidance was weaker than expected. The US economic environment remains robust, with the unemployment rate falling to 3.7%, the lowest in almost 50 years, and third quarter US GDP at 3.5% quarter-on-quarter annualised, beating consensus expectations.
In Australia, the Reserve Bank unsurprising kept rates on hold for the 24th consecutive meeting at 1.50% and inflation disappointed with the consumer price index (CPI) at 1.9% annualised for the September quarter. In line with global markets, the ASX 300 fell 6.2% over the month. Australian small caps stocks (-9.6%) underperformed, while large caps (-5.4%) outperformed. The IT sector (-11.4%) reversed some of its recent gains, while the Energy sector (-10.3%) was negatively impacted by weaker global oil prices. The more defensive sectors of Utilities (-4.0%) and REITs (-3.8%) were the strongest performing sectors.
From a currency perspective the Australian dollar was mixed against the major currencies during October. It fell against the USD (2.0%) and the Yen (2.7%), was flat against the Pound and appreciated slightly against the Euro (0.4%). In aggregate, these moves resulted in unhedged equities (-5.4%) outperforming hedged equites (-6.9%).
US yields rose over the month with the 10-year rising above 3.20% inter-month, before ending at 3.15%. Notably this rise was mostly driven by real rates moving higher, with inflation weakening over the month as US headline CPI fell to 2.3% year on year (from 2.7% in the prior month). In Australia, the UK, Europe, and NZ, yields fell and were flat in Japan. Italian 10-years yields continued their recent volatility and rose to 3.4% on the back of the above mentioned budget proposal rejection and credit downgrade.
Source: FactSet / JANA
Source: FactSet / JANA -
Market Commentary September 2018
Most equity markets posted positive third quarter returns, primarily driven by continued robust economic growth emanating from the US. This was despite continued global trade tensions and some European and Emerging Markets countries facing economic headwinds. The Trump Administration’s 10% tariff on a further US$200bn worth of Chinese imports came into effect at the end of the quarter with China’s Finance Ministry retaliating, announcing tariffs on $60bn of US imports ranging from liquefied natural gas, to agricultural and energy products. Posturing continued from both sides as China moved to align more closely with Europe and Japan, implementing some modest tariff cuts on imports from these regions. Meanwhile, the US and Canada entered into a new trade agreement, joining Mexico in a revision of NAFTA.
In Europe, concerns around the Italian government’s fiscal outlook played on sentiment, while in the UK, Brexit continued to dominate headlines as the March 2019 deadline nears with no formal agreement in sight. In the Middle East, geopolitical tension between the US and Iran intensified, as President Trump continued to threaten countries who accept Iranian oil exports and the EU enacted an updated Blocking Statute to nullify US sanctions on countries trading with Iran. Turkey faced their own political challenges as tensions with the US escalated, with Trump introducing a 25% tariff on steel imports which he subsequently doubled. This resulted in a sharp depreciation in the Turkish Lira.
Investors responded positively to US corporate earnings, driving US equities higher over the quarter. Economic data continued to underpin the view of a strong US economy as consumer confidence hit its highest level since 2000, wage growth experienced its highest level in nine years, and small business optimism reached new highs. US headline inflation stood at 2.7% (YoY) in August, well above the Federal Reserve’s target of 2%, although this is partly due to the transient impact of elevated oil prices.
The September quarter was positive for Australian equities as investors ignored the political turmoil associated with the change of Prime Minister. The Telecommunications sector led the Australian market higher as the announcement of a merger between Vodafone and TPG was viewed positively by the market. The Financial Services Royal Commission continued to weigh on the Financial Services sector, with the Interim Report being released at quarter end. The RBA’s decision to leave the official rate at 1.5% for the 23rd consecutive meeting was followed by the release of GDP data for the year-to-June which came in at 3.4%, above the RBA’s forecast of 3%. Weakness in the housing market continued with dwelling values down 2.2% from their peak in September last year.
The MSCI World ex-Australia Index (hedged into AUD) rose 5.7% over the quarter. Across developed markets, the US (7.5%) and Norway (6.8%) outperformed, while Greece (-17.16%) and Ireland (-4.8%) were among the weakest performing countries in local currency terms. The MSCI Emerging Markets Index (1.1%) underperformed unhedged developed markets (7.5%).
The S&P/ASX300 Accumulation Index (1.5%) underperformed hedged overseas equities for the quarter but outperformed over the one-year period. Small cap stocks underperformed large cap stocks, with the ASX Small Ordinaries Accumulation Index returning 1.1% and the S&P/ASX50 Accumulation Index returning 1.2%. Australian property trusts (2.0%) outperformed the broader Australian market over the quarter, and outpaced global listed property (0.4%).
Australian bonds returned 0.5% over the quarter, outperforming hedged international bonds (-0.1%). The Australian dollar (AUD) depreciated against the USD (-2.1%), the Euro (-1.6%) and Pound (-0.9%), was flat against the New Zealand dollar and appreciated against the Japanese Yen (0.4%).
Source: FactSet / JANA
Source: FactSet / JANA
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Market Commentary August 2018
Global equities posted a positive return in the month of August (MSCI AC World index rising 3.7% on an unhedged basis) primarily driven by continued robust economic growth emanating from the US. This was despite continued global trade tensions and deteriorating conditions in a handful of emerging market countries. Against this backdrop, it was unsurprising the month of August saw wide dispersion in performance around the world, with some European and Emerging Markets facing headwinds despite the positive global trend.
In the US, economic data continued to underpin the view of a strong economy as the unemployment rate dropped to 3.9% and GDP growth for the second quarter was revised upwards to 4.2%. To complement this strong economic data, strong second quarter earnings resulted in the S&P500 rising 3.2% in August. While the Fed signaled further rate hikes are likely to continue in the medium term, there was no indication they would be more aggressive than forecast which buoyed market sentiment. Offsetting this was trade concerns which remain elevated as the rhetoric around more tariffs continued. In this regard, the United States and China trade war escalated at the margin as the latter implemented a further 25% tariff on selected US imports, including coal and petroleum. In contrast, substantial steps appear to have been taken in renegotiating the North American Free Trade Agreement (NAFTA), with the US and Mexico having struck a trade deal in late August.
In contrast, European markets underperformed primarily due to concerns of a hard Brexit and spillover from the challenges facing Turkey. The government in the UK started preparations for the possibility of a hard exit from the European Union which weighed on equities (-4.1%). Turkey on the other hand, faced their own political challenges as tensions between Turkey and the US escalated. The introduction of a 25% tariff on steel exports to the US caused a sharp depreciation in the Turkish Lira, losing almost half its value against the USD.
The month of August was positive for Australian equities as investors ignored the political turmoil associated with the change of Prime Minister. The Telecommunications sector led the Australian market higher as the announcement of a merger between Vodafone and TPG was viewed positively by the market. In terms of monetary policy, the RBA left the cash rate on hold at 1.50% for the 22nd meeting as it looks to balance concerns of international trade policy uncertainty, a continued easing in housing markets in Sydney and Melbourne and ongoing weak wage growth.
From a currency perspective, the Australian dollar continued it weak trend against the USD (-2.7%). The AUD also depreciated against the Yen (-3.6%), the Pound (-1.8%) and the Euro (-2.2%). In aggregate, this depreciation resulted in unhedged equities outperforming during the month as seen in the MSCI World ex-Australia Index unhedged return of 4.2%, compared to the hedged return of 1.5%.
The S&P/ASX300 Accumulation Index rose 1.4% over the month. Small cap stocks (2.5%) outperformed the broader market, while large caps (1.0%) underperformed. Telecommunications and Information Technology were the top performing sectors, returning 13.0% and 12.2% respectively, whilst the Materials sector was the weakest (-4.9%).
Yields over the month fell across most developed markets, with the US 10-year yield (2.9%) remaining higher than the Australian 10-year yield (2.5%). Meanwhile the German (0.3%) and NZ (2.5%) 10-year yields fell while the UK yield rose to 1.4%.
Source: FactSet / JANA
Source: FactSet / JANA -
Market Commentary July 2018
Despite trade and geopolitical tensions persisting through July, global equities moved higher, rising 3.2% on a hedged AUD basis. Tensions between the US and China heightened further, with the Trump administration outlining an additional US$200bn worth of Chinese goods eligible for tariffs, which was soon followed by China announcing tariffs on US agriculture products. This contrasted with European negotiations, where EU President Jean-Claude Juncker pledged to work towards easing trade barriers with the US during his trip to Washington. Brexit continued to dominate headlines in the UK as the March 2019 deadline to reach a final agreement nears with no formal agreement in sight. In the Middle East, geopolitical tension between the US and Iran intensified, as President Trump continued to threaten countries who accept Iranian oil exports.
US markets responded positively to US corporate earnings results, with the S&P 500 rising 3.6%. The vast majority (~80%) of US firms surpassed Wall Street expectations, and ten out of eleven sectors increased earnings by at least double digits. The favorable corporate backdrop is in part due to US corporate tax reductions passed into legislation at the end of 2017. This has also supported US economic activity which grew at an annualised rate of 4.1% during the second quarter. Unsurprisingly, businesses are optimistic, with the manufacturing PMI remaining well in expansionary territory. US headline inflation stood at 2.9% (YoY) in July, well above the Federal Reserves target of 2%, although this is partly due to elevated oil prices which have a temporary effect.
The Australian equity market underperformed global peers, as the ASX 300 returned 1.3% in July. However, it did register its first monthly close above 6200 in over 10 years. Economic data released during the month was strong, as consumer confidence rose to its highest level in over four years and unemployment remained at a five-and-a-half-year low of 5.4%. The RBA left the official cash rate on hold at 1.5% for the 23rd month in a row, with no change to their forward outlook. Commodity prices pulled back during the month, resulting in the Materials sector dragging on the ASX, particularly as coking coal (-13.2%), lead (-11.0%) and zinc (-7.9%) fell over the month. Australian residential prices continued to soften, declining 0.6% in July having now fallen 1.6% over the rolling 12 months.
Australian small caps stocks (-1.1%) underperformed the broader market, while large caps (1.6%) outperformed. Utilities (-1.4%) and IT (-1.1%) underperformed in July, while Telecommunications significantly outperformed (7.6%), primarily due to Telstra which rose 8.4% as the market reacted positively to the organisation’s restructuring plans set to take effect in October.
The Australian dollar appreciated against most major trading partners during the month, rising against the USD (0.6%), the Yen (1.7%) and the Pound (1.3%). The strengthening Australian dollar resulted in hedged global equities (3.2%) outperforming unhedged global equities (2.5%). Germany (4.1%) and the US (3.6%) were the top performing MSCI developed markets, whilst New Zealand (-1.0%) and Australia underperformed. In aggregate, developed markets (2.5%) outperformed emerging markets (1.7%).
Bond yields rose slightly across most developed nations, as the UK 10-year yield rose to 1.34%, the US yield rose to 2.97% and the Euro 10-year closed at 0.45%. The Australian 10-year yield rose marginally to 2.66%, while New Zealand bond yields fell slightly to 2.76%.
Source: FactSet / JANA
Source: FactSet / JANA -
Market Commentary June 2018
Global equity markets saw gains in June, rising 2.4% on an unhedged and 0.3% on an AUD hedged basis, but as usual these overall returns masked significant volatility across geographies. Geopolitical tensions eased somewhat, with the historic meeting between US President Donald Trump and North Korean leader Kim Jong-un taking place in Singapore. The two leaders signed an agreement pledging to work toward complete denuclearisation of the Korean peninsula, although it was criticised for being light on specifics. Trade concerns remain elevated due to the implementation of President Trump’s steel and aluminium tariffs on products imported from the EU, Canada and Mexico on 1 June. Additionally, the US Administration announced tariffs on a further US$50 billion of Chinese goods, including US$34 billion of goods on which a 25% tariff will apply from 6 July. These trade concerns mostly weighed on emerging market equities, chiefly China.
In the US, stronger economic data released for May, including lower unemployment and evidence of a continued gradual uptrend in inflation, gave the Federal Reserve confidence to raise interest rates for the second time this year to the target range of 1.75% - 2.00%. The Fed also signaled two further rate hikes later this year, followed by three more next year. In contrast, the European Central Bank announced that rates are not likely to rise until mid-2019 due to low inflation and modest economic growth, however it did confirm that it would cease its quantitative easing programme at the end of the 2018 calendar year as scheduled. Italian bonds had a volatile month due to uncertainty surrounding the new government’s ambitious policy agenda and fiscal sustainability, but yields fell back slightly from their steep rises during May.
In Australia, the Financial sector saw a broad recovery following the selloff that surrounded the Royal Commission, with only six of 26 companies in the ASX 200 Financials sector ending the month with a negative return. In terms of monetary policy, the RBA left the cash rate on hold at 1.50% for the twentieth meeting in a row while balancing concerns of international trade policy uncertainty, a continued easing in housing markets in Sydney and Melbourne and ongoing weak wage growth.
The Australian dollar continued to depreciate against the USD (-2.4%) due to contrasting monetary policy and reduced commodity prices. The AUD also depreciated against the Yen (-0.4%), the Pound (-1.6%) and the Euro (-1.4%). In aggregate, this depreciation resulted in unhedged equities outperforming during the month as seen in the MSCI World ex-Australia Index unhedged return of 2.4% compared to the hedged return of 0.3%. Australia (3.2%) and Switzerland (2.0%) were the top performing developed markets, while Hong Kong (-4.9%) and Singapore (-5.6%) underperformed. Emerging markets (-1.8%) again underperformed developed markets (2.4%).The S&P/ASX300 Accumulation Index rose 3.2% over the month. Small cap stocks (1.1%) underperformed the broader market, while large caps (3.7%) outperformed. Energy was the top performing sector, returning 7.7% as crude oil prices traded higher. Telecommunications significantly underperformed (-5.5%) due to Telstra’s (83% of the sector) poorly received restructure announcement and silence from the company on forecasts for its FY19 dividend.
Relatively flat bond yields over the month across most developed markets led to small positive returns for bond investors. The US 10-year yield (2.85%), whilst down on its intra-month high of 3% due to safe-haven buying around Italy’s election, remains higher than the Australian 10-year yield (2.64%). Elsewhere in the world, UK 10-year yields rose to 1.3%, Euro 10-year yields fell to 0.3%, Japanese 10-year yields were unchanged at 0.03%, and the New Zealand 10-year yield fell to 2.8%.
Source: FactSet/JANA
Source: FactSet/JANA