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.
-
Market Commentary January 2019
January provided some respite for global markets as concerns over rising US interest rates faded, China signaled a continued desire to stimulate the economy and the US temporarily reopened the government after the longest federal government shutdown in history.
The US equity market started the 2019 calendar year positively with the S&P 500 appreciating 7.9% over the month of January. In large part this strong performance was driven by the Federal Reserve (Fed) indicating they would become more ‘patient’ in their pursuit of policy normalisation. These comments were welcomed by investors and alleviated fears the Fed was too ‘hawkish’ with their interest rate policy (i.e. wanting to continue to tighten). Furthermore, robust economic data in the US, despite a federal government shutdown for most of January, and news that trade talks with China were progressing were viewed favorably by global markets.
Elsewhere, the UK equity market followed global markets up, buoyed by stronger than expected GDP growth and falling inflation. This was despite all the challenges the UK faces with the imminent Brexit deadline after Theresa May’s Brexit deal was defeated convincingly in UK Parliament in January. In China, growth continued to slow as the effects of the US/China trade war flowed through to the broader economy. However, Chinese equity markets moved higher over the month as the People’s Bank of China (PBOC) announced additional easing measures and positive news flow in relation to trade talks with the US.
The Australian equity market rallied alongside global equity markets in January with the ASX 300 rising 3.9% January, although performance was more modest than global equities (7.1%). The weaker relative performance was driven by the Financials sector (-0.3%) which was weighed down by investor expectations of potential negative implications flowing from the Royal Commission into Financial Services final report which was due for release in early February. The Energy sector saw the largest monthly appreciation (11.5%) as crude oil prices rebounded from a disappointing December quarter, followed by the IT sector (8.8%) which also benefited from the global market rally.
The Australian dollar appreciated against most major currencies during January, rising marginally against the Pound (0.3%), and more significantly against the USD (3.6%), Euro (3.2%), and Yen (2.7%). In aggregate, these moves resulted in hedged global equities (7.1%) outperforming hedged equites (4.1%).
Slightly lower bond yields across most developed markets led to small positive returns for most bond indices. Yields on US 10-year (2.63%), Australian 10-year (2.23%), and UK 10-year (1.22%) government bonds all traded lower. Credit indices outperformed broader fixed income indices over the month recovering some of the losses from late 2018.
Source: FactSet / JANA
Source: FactSet / JANA
-
Market Quarterly Commentary December 2018
Rising geopolitical tensions set the tone for the quarter as global markets experienced a spike in volatility. The material decline in markets over the fourth quarter, and especially sharp decline in December, was largely attributable to persistent concerns over rising US interest rates, global trade tensions and slowing economic growth. The risk-off sentiment was reflected in lower bond yields over the quarter, as the US Federal Reserve’s (Fed) comments indicated a slightly more dovish tone and the potential for a slower path towards interest rate normalisation, with two rate hikes now expected in 2019.
Political affairs continued to weigh on sentiment throughout the quarter. Developments in the US-China trade tensions led to a deferral in the 1st January 2019 tariff increases, as well as China announcing they would purchase a substantial amount of agricultural, energy and other goods from the US. In the face of these external headwinds, China’s growth has slowed, with the economy recording its weakest quarterly growth since the global financial crisis. In response to decelerating growth, the People’s Bank of China (PBoC) cut its reserve requirement ratio in October in an attempt to stimulate bank lending. In Europe, the European Central Bank (ECB) announced it would stop its quantitative easing programme in January, confirming interest rates would stay unchanged until the end of summer 2019. The long-running controversy over Italy’s budget for the 2019 fiscal year was settled, narrowing its budget deficit to 2.04% compared to the 2.4% originally envisaged. The UK published its draft EU Withdrawal Agreement in November, which was met with mixed reactions, particularly around the proposal for the Northern Ireland border. The ongoing uncertainty around Brexit has raised questions on the political stability of the UK government, weighing heavily on business and consumer confidence. Oil prices fell over the fourth quarter amid concerns of a supply glut and weakening outlook in global demand.
The Australian economy grew a meagre 0.3% over the third quarter, which was the weakest growth in two years. The Reserve Bank unsurprisingly kept rates on hold at 1.50%, as inflation disappointed with the consumer price index (CPI) at 1.9% annualised for the September quarter. Investor sentiment has become more negative, pricing in increasing regulatory risk and a potential change in Government. From a fundamental perspective, the Commonwealth Treasury’s Mid-Year Economic and Fiscal Outlook provided an improved 2019/20 budget surplus forecast from A$2.2B to A$4.1B, strengthening economic expectations.The MSCI World ex-Australia Index (hedged into AUD) declined 13.5% over the quarter. Emerging markets broadly outperformed developed markets, with Brazil (10.2%) and Hungary (6.7%) posting the strongest returns. Across developed markets, Hong Kong (-4.5%) and Singapore (-6.9%) were among the strongest performing countries, while Austria (-19.4%) and Japan (-17.1%) underperformed the broader developed market in local currency terms.
The S&P/ASX 300 Accumulation Index (-8.4%) outperformed hedged overseas equities for the quarter and over the one-year period. Small cap stocks underperformed large cap stocks, with the ASX Small Ordinaries Accumulation Index returning -13.7% and the S&P/ASX 50 Accumulation Index returning -6.8% over the quarter. Global listed property underperformed Australian listed property, with the FTSE EPRA/NAREIT Developed Index (hedged in AUD) returning -5.5%.
Australian bonds returned 2.2% over the fourth quarter, outperforming hedged international bonds (1.7%). The Australian dollar (AUD) depreciated against all major currencies over the quarter, falling against the USD (-2.7%), the Euro (-1.1%) and Pound (-0.4%), the New Zealand dollar (-3.8%) and the Japanese Yen (-6.0%).
Source: FactSet / JANA
Source: FactSet / JANA -
Market Commentary December 2018
Weakness in global markets accelerated in December as concerns over rising US interest rates, continued geopolitical concerns and less synchronised global growth weighed heavily on investor sentiment. Hopes of a “Santa Rally” were short-lived, as December registered its worst monthly performance since 1970. This period of weakness was also combined with a material spike in market volatility. From a fundamental perspective, while some economic data points were weaker than expected, in aggregate economic data remained positive, with US growth expectations holding steady and global growth expectations only declining modestly.
The US equity market fell in December for the second consecutive month, with the S&P 500 declining 9.1%. Increased uncertainty around monetary policy contributed to the sharp market decline. During the month, the Fed raised its benchmark interest rate by 0.25% to a range of 2.25% to 2.5%. While this was the fourth increase in 2018 and widely expected by investors, the Fed did lower its projections for future hikes in 2019. From a geopolitical perspective, ongoing trade concerns between the US and China thawed, with both countries commenting on the ongoing positive dialogue. Notably, the US announced a deferral in the 1st January 2019 tariff increases (from 10% to 25% on selected Chinese good) and China announced they would purchase a substantial amount of agricultural, energy and other goods from the US. Somewhat offsetting this positive tone was the arrest of a senior executive of Chinese company Huawei in Canada, at the request of the US. The European Central Bank announced it would stop its quantitative easing programme in January despite the slowdown in growth, instead focusing on the firming wage growth across Europe. Oil prices crude continued to sell-off in December amid concerns of a supply glut and a global economic slowdown.
The Australian economy grew a meagre 0.3% over the third quarter, which was the weakest growth in two years. The slowing pace of expansion was largely driven by a sharp pull-back in household spending and non-residential construction. The ASX 300 fell 0.2% over the month, significantly outperforming global markets. The Telecommunications (-5.1%) and IT (-4.1%) sectors drove this decline over the month, while Materials (5.1%), Utilities (2.8%) and Health Care (2.4%) were the strongest performing sectors. Australian large caps (0.6%) outperformed, while small caps stocks (-4.2%) underperformed.
The Australian dollar depreciated against all major currencies during December, falling to its weakest level since February 2016, on the back of weak China manufacturing data. The AUD fell against the USD (-3.6%), Yen (-6.9%), Pound (-3.4%), and Euro (-4.5%). In aggregate, the depreciation in the AUD resulted in MSCI World Index unhedged returns (-4.2%) outperforming hedged returns (-8.3%).
Bond yields fell across most developed markets over the month, with the US 10-year falling to 2.7% to conclude the year only fractionally higher than the beginning of the year. In Australia, the 10-year yield fell to 2.3%, while yields in in the UK, Japan and Eurozone declined modestly.
Source:FactSet/JANA
Source:FactSet/JANA -
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