International equity markets experienced a solid bout of performance over July 2018, despite the continued back-and-forth trade altercations between China and the United States (US), as the MSCI World ex Australia Index (hedged (H)) rose 3.2%. This increase was supported by US and European markets, with emerging markets (EM) also recovering from its previous slump the month before. The large cap domestic market was able to take part in the positive movement, but underperformed its hedged international counterpart, as the S&P/ASX 300 Index increased 1.3%. Domestic small caps decreased 1.0% as investors took profits following an impressive 2017-18 financial year performance.
Trade tensions remained a key driver of international discourse, influencing market volatility, as the US initiated tariffs on USD34 billion of Chinese goods. Another USD16 billion of tariffs are scheduled to come into play for early August, with President Trump threatening further tariffs on potentially USD550 billion across all Chinese imports.
The Chinese responded to the tariffs in kind, while the Chinese Yuan has steadily declined since the tariffs came into play, with speculation the People’s Bank of China (PBOC) is easing currency support in response to the trade threats. The PBOC also eased some of its banking capital rules, in order to decrease the pressure on their economy and support consumer lending, in a move which would not add much confidence to their shaky debt situation. The Chinese SSE Composite was unfazed over the month, increasing by 1.0%, benefitting from dropping oil prices and supported by the PBOC’s plays.
The US market was also largely unfazed by the trade tension, as solid second quarter earnings reporting and positive economic data drove investor confidence. Over July, the NASDAQ rose 2.2%, the S&P 500 Composite Index rose by 3.7% and the Dow Jones Industrial Average increased by 4.8%, all in USD terms. The US advanced estimate for Q2 2018 gross domestic product (GDP) is 4.1% quarter-on-quarter (QoQ) annualised, slightly below expectations for 4.2%, but the highest growth rate seen since 2014. However, the market was not without some bumps as prominent tech stock Facebook plunged circa 20%, following disappointing earnings forecasts. Twitter followed in similar fashion, dropping 20% off a decline in reported monthly user accounts. The drops signified a loss of investor confidence in technology stocks following increased scrutiny on the sector after the Facebook Cambridge Analytica scandal, as the potential for increased regulation looks likely to constrain profits in the future.
The Australian market was able to withstand the shifting environment due to positive reporting results, with Financials and Telecoms experiencing a change of fortune, increasing 2.0% and 7.6% respectively, to drive performance over July. ANZ and CBA were key drivers of performance, as both beat market expectations following a heady period of scandal during the Royal Banking Commission.
Crude oil prices dropped 6.3% over July as the Organisation of the Petroleum Exporting Countries (OPEC) production output increased to record highs for 2018, following pressure from the US on producers to curb the effects of sanctions on Iran.
The Reserve Bank of Australia (RBA) decided to leave the cash rate unchanged again in its early August meeting at 1.50% per annum (pa), remaining at the same level since August 2016. RBA Governor, Philip Lowe, noted that the global economic expansion is continuing, however growth in China has slowed a little, with authorities easing policy and paying close attention to risks, particularly in the financial sector. Money market interest rates in Australia are higher than at the beginning of the year, although have declined since the end of June. These have not fed through into higher interest rates on retail deposits. The farming sector is currently experiencing difficult conditions as a result of the ongoing drought. Employment growth continues to be faster than growth in the working-age population, with a further gradual decline in the unemployment rate expected, to around 5% over the next couple of years. Recent inflation data were in line with RBA’s expectations, with underlying consumer price index (CPI) reaching close to 2%. The RBA continues to view a low level of interest rates as ideal in supporting the current Australian economy.
Australian seasonally adjusted employment increased 50,900 in June, above expectations for a 16,500 rise while May figures were revised to an increase of 13,400. The unemployment rate remained at 5.4% for June, in line with expectations. The participation rate increased to 65.7%, above expectations of 65.5%. Part time jobs increased by 9,700 and full time jobs increased by 41,200.
Australian building approvals increased 6.4% month-on-month (MoM) to be up 1.6% for the year to June, compared to previous levels of -2.5% (revised) and 4.1% (revised) for respective periods ending May.
The Institute for Supply Management (ISM) Manufacturing Index recorded 58.1 in July, below consensus for 59.4, and below the 60.2 recorded in June. Of the 18 manufacturing industries, Textile Mills, Electrical Equipment, Appliances and Components and Apparel, Leather and Allied Products were the top contributors and Primary Metals was the only industry that reported a decrease in July. The ISM Non-Manufacturing Index recorded 55.7 in July, below consensus for 58.6, and below the 59.1 for June. Of the 18 non-manufacturing industries, the top performers in July were Mining, Public Administration and Agriculture, Forestry, Fishing and Hunting, while Educational Services and Professional, Scientific and Technical Services were the only industries to report contraction over the month.
US Non-Farm Payrolls increased by 157,000 in July, below the previous 248,000 increase (revised) for June. The unemployment rate decreased to 3.9% in July.
US GDP advanced estimate for Q2 2018 is 4.1% QoQ annualised, below expectations for 4.2%. • The Caixin Manufacturing purchasing managers’ index (PMI) in China recorded 50.8 in July, only slightly below expectations for 50.9. The indicator hit an eight-month low, as orders fell at the fastest pace in more than two years.
An advanced estimate of the European Core CPI saw an increase to 1.1% over the year to July, above expectations for 1.0%.
The Eurozone composite PMI decreased to 54.3 in July, below 54.9 for June, as economic growth in the euro area begins to slow at the start of the third quarter.
An advanced estimate released for Q2 2018 Eurozone seasonally adjusted GDP decreased to 2.1% for year-on-year and 0.3% QoQ.
The Australian equity market underperformed its hedged international counterpart index over the month, as the S&P/ASX 300 Index increased 1.3%. The S&P/ASX 50 Index was the strongest relative performer, increasing 1.6%, while the S&P/ASX Small Ordinaries was the weakest, decreasing 1.0% over the month.
The best performing sectors were Telecom Services (+7.6%) and Industrials (+3.2%), while the weakest performing sectors were Utilities (-1.4%) and IT (-1.1%). The largest positive contributors to the return of the index were ANZ, CBA and BHP Billiton, with absolute returns of 4.2%, 2.6% and 3.1% respectively. In contrast, the most significant detractors from performance were IAG, Evolution Mining and Rio Tinto with absolute returns of -5.7%, -20.4% and -2.3% respectively.
The broad MSCI World ex Australia (NR) Index increased 3.2% in hedged terms and 2.5% in unhedged terms over the month, as the AUD appreciated against most major currencies. The strongest performing sectors were Healthcare (+5.5%) and Industrials (+4.1%), while Real Estate (+0.5%) and Consumer Discretionary (+0.6%) were the worst performers. In AUD terms, the Global Small Cap sector was up 0.6% and Emerging Markets increased by 1.6%.
Over July, the NASDAQ increased 2.2%, the S&P 500 Composite Index increased by 3.7% and the Dow Jones Industrial Average increased by 4.8%, all in USD terms. In local currency terms, major European equity markets experienced positive returns as the FTSE 100 (UK) increased 1.5%, the DAX 30 (Germany) increased by 4.1% and the CAC 40 (France) increased by 3.5%. In Asia, the Japanese TOPIX (+1.3%), Chinese SSE Composite (+1.0%) and the Indian S&P BSE 500 (+5.4%) all increased while the Hang Seng (-0.5%) decreased over July.
The Real Assets sector was positive over July. The FTSE Global Core Infrastructure index increased 2.1% while Global Real Estate Investment Trusts (REITs) also increased 1.0% over the month (both in AUD hedged terms). Domestic REITs posted an increase of 1.0% over July, while Australian Direct Property (NAV) returned 2.0% on a one-month lagged basis.
Global bond markets were slightly negative over July as yields rose across all major regions. The Barclays Capital Global Aggregate Bond Index remained level and the Citigroup World Government Bond (ex-Australia) Index fell 0.2% over the month. Ten-year bond yields increased in Germany (+8 basis points (bps) to 0.38%), the US (+10bps to 2.96%), Japan (+2bp to 0.05%), and the UK (5bps to 1.33%). Meanwhile, two-year bond yields also experienced positive movements over the month as US yields rose (+13bps to 2.66%) along with Germany (+11bps to -0.57%), the UK (+4bps to 0.76%) and Japan (+1bps to -0.11%).
Returns for existing domestic bond holders were mildly positive over July, despite 10-year yields (+2bp to 2.65%), five-year yields (+1bp to 2.30%) and two-year yields (+1bps to 2.03%) all increasing marginally. Of the Bloomberg Ausbond indices, the Credit Index produced the highest return, increasing 0.3% over the month, while the Australian Bank Bill Index return was 0.2% over the month.
The AUD appreciated against the USD over July, ultimately finishing with a higher Trade Weighted Index of 63.5 on 31 July 2018. The AUD appreciated against the Yen (+1.1%), the Pound Sterling (+0.5%) and the USD (+0.6%) and remained flat against the Euro. On a tradeweighted basis, the local currency increased 1.4% over the month.
Iron Ore increased 2.2% over July, finishing the month at $68.5 per metric tonne. The S&P GSCI Commodity Total Return Index dropped 4.1% over the month. Gold prices finished the month at US$1222.01 per ounce, falling 2.3% over the period, while the oil price fell 6.3% to $74.5 per barrel over July.