See below to find out how Australian and international share markets, bonds and currencies have been performing in recent months.
US manufacturing hits 13 year high
In summary, markets performed well during October driven in part by strong gains in US manufacturing.
Low inflation ‘biggest surprise’ in US
The US ISM Manufacturing Index (measuring manufacturing, mining, electric and gas industry output) hit a 13-year high during September. Despite the US economy’s strong recovery, Federal Reserve Chair Janet Yellen commented that low inflation (1.7% for the year to September) was the ‘biggest surprise in the US economy’.
Australian shares perform well
Australian shares ended October higher, driven by the Energy sector’s strong performance. September quarter inflation came in at 1.8% year-on-year, lowering expectations of an interest rate increase in the near term. The S&P/ASX300 Accumulation Index rose 4% over the month. Small Cap (6%) stocks outperformed, while Large Cap (3.5%) stocks underperformed.
The MSCI World Index ex-Australia (hedged into AUD) rose 2.7% during October. The Australian dollar depreciated against most developed market currencies in October, resulting in a return for unhedged overseas shares of 4.3% (in AUD). In developed markets, Japan (5.6%) and Germany (3.0%) outperformed the broader market, while Switzerland (1.3%) and the UK (1.6%) underperformed.
The yield on 10-year Australian Government bonds fell to 2.7% over the month. Elsewhere, US and Japanese 10-year Government bond yields rose, while UK, Euro and New Zealand 10-year Government bond yields fell. In Australia, short dated bonds underperformed the broader market, while inflation-linked bonds outperformed.
Source – JANA
US dollar weakness reverses
US dollar weakness reverses
In September 2017, the Bank of Canada announced an interest rate hike and the Bank of England signalled it may take similar action. The US Federal Reserve (Fed) announced its balance sheet reduction plans would begin in October. These events, combined with an increase in US inflation, led to a rally in global yields. US Dollar weakness reversed in the second half of September due to increased inflation and improved forecasts for the economic impact of the hurricanes. Towards the end of the month, President Trump provided more detail on plans to reduce the US corporate tax rate from 35% to 20%.
Australian growth remains low
Australian GDP came in below expectations, indicating the economy grew by 0.8% for the June 2017 quarter, bringing year-on-year growth to 1.8%. Toward the end of September, the AUD depreciated due to a divergence in the Australian monetary policy outlook relative to other developed economies, a fall in iron ore prices of nearly 20%, and a credit rating cut on China’s government debt by Standard & Poor’s.
Market performance by sector
The S&P/ASX300 Accumulation Index was broadly unchanged over September. Small Caps outperformed the broader market, while Large Cap stocks underperformed. Health Care, Energy and Financials outperformed, and Telecommunication Services and Utilities performed worst. The yield on 10-year Australian Government bonds rose to 2.8%. The US, UK, Japanese, Euro and New Zealand 10-year Government bond yields rose.
RBA lowers growth forecast
The geopolitical backdrop
Geopolitical risks escalated in August 2017 as North Korea defied UN restrictions by firing a missile across Japan. With this backdrop, unsurprisingly Investors reduced investments in equities and bought ‘safe haven’ assets such as gold.
Many US companies reported quarterly earnings in August, with most S&P 500 firms beating expectations. The US unemployment rate was historically low at 4.3%, but inflation remained a concern.
The MSCI World Index ex-Australia (hedged into AUD) rose 0.3% over August. The AUD depreciated against most developed market currencies. The UK (1.5%) outperformed, while Switzerland (-1.2%) and Germany (-0.6%) underperformed. The MSCI Emerging Markets Index (2.9%) outperformed unhedged developed markets.
Australian economic conditions
The RBA left interest rates unchanged in August. Due to the ‘dampening effect’ a rising AUD has on inflation, growth and employment, the RBA lowered the growth forecast. Wage growth stayed low, at 0.5% over the June quarter. Australian companies delivered mixed earnings results, with an increase in those failing to meet expectations.
The Australian share market
The S&P/ASX300 Accumulation Index rose 0.7% over August. Small Caps (2.7%) outperformed, while Large Caps (-0.8%) underperformed. Energy (5.2%), Consumer Staples (5.2%) and Industrials (4.6%) outperformed. Telecommunications (-7.2%) and Financials (-2.1%) performed worst.
The yield on 10-year Australian Government bonds was unchanged. Short-dated and inflation-linked bonds both outperformed the broader market. US, UK, Japanese, Euro and NZ 10-year bond yields fell.
Source - JANA