See below to find out how Australian and international share markets, bonds and currencies have been performing in recent months.
2017 ends on a strong note
The US economy strengthens
The equity bull market continued in December 2017. The US saw particularly strong gains, with 2017 the first year the S&P 500 ended each month with a gain. The US Senate passed the Tax Code Reform Bill, which reduces the corporate tax rate to 21%. Expectations of tax cuts have been a key driver of US equity market strength since Trump's election.
The US economy improved in December, enabling the Federal Reserve to increase interest rates to 1.5%, and raise its 2018 GDP estimate to 2.5% and its inflation estimate to 1.7%.
Australia: Housing cools
In Australia, with low inflation and wage growth, the RBA left the cash rate on hold at 1.5%. Housing cooled further, with the ABS National House Price Index down 0.2%. The ASX Consumer Discretionary Index rose 3% and commodities rallied, with copper, iron ore and coal rising.
How Australia performed globally
The MSCI World Index ex-Australia (hedged into AUD) rose 1.2% in December. The AUD appreciated against most developed markets in December, with a return for unhedged overseas equities of -1.7% (in AUD). The UK and Japan outperformed the broader developed markets, while France and Germany underperformed.
The S&P/ASX300 Accumulation Index rose 1.9% over the month, with Small Cap stocks outperforming. Energy and Materials were the strongest performing sectors in Australia, while Utilities and Industrials were the weakest. The yield on 10-year Australian Government bonds rose to 2.7% over December. Bond yields rose across most developed nations.
Source - JANA
OECD urges Australia to raise interest rate
Geopolitical risks increased in November 2017, with North Korea conducting further missile tests, Venezuela defaulting on its foreign debt and a corruption crackdown in Saudi Arabia. Despite weak growth, the Bank of England raised interest rates, citing higher inflation and an unemployment rate at a 42-year low.
The Australian economy
Australian wage growth is subdued, at 2% for the September quarter (year-on-year), despite low unemployment. The Australian Bureau of Statistics (ABS) estimates that inflation is overstated by 0.22%, due to a shift in spending as rising rent, childcare and education prices take more of the average household income. The ABS will ‘re-weight’ the CPI benchmark from the December 2017 quarter. The OECD urged Australia to raise official interest rates, despite weak inflation, to cool the housing market and prevent a blowout in risky debt levels. Despite this, interest rates remain on hold.
The MSCI World Index ex-Australia (hedged into AUD) rose 1.7%. The AUD depreciated against most developed market currencies, which resulted in a return for unhedged overseas equities of 3.3%. Hong Kong (3.5%) and the US (3.0%) outperformed the broader market, while France (-2.0%) and the UK (-1.8%) underperformed. The MSCI Emerging Markets Index (1.2%) underperformed unhedged developed markets.
The S&P/ASX300 Accumulation Index rose 1.7% over November. Small Caps (3.9%) outperformed, while Large Caps (1.2%) underperformed. Property Trusts (5.3%), IT (4.5%) and Energy (4.3%) outperformed, and Telecommunications (-1.6%) and Financials (0.0%) performed worst.
The yield on 10-year Australian Government bonds fell to 2.5% in November. Japanese and New Zealand 10-year Government bond yields fell, while the US, UK and Euro 10-year Government bond yields were broadly unchanged.
Source - JANA
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