Global equities continued to rally during April, as overseas developed shares increased 3.9% in hedged terms over the month.
The sustained rebound since the difficult December period has been supported by a shift in tone by several central banks to more accommodative monetary policies, an anticipated resolution surrounding the US-China trade dispute and a better than expected start to earnings season.
There was an influx of positive developments on the US-China trade dispute over the month, with news that the two parties were inching closer and closer to a deal. These developments spurred a wave of positive sentiment which carried on the positive performance from the March quarter.
Over April in USD terms, the NASDAQ increased 4.7%, the Dow Jones Industrial Average increased by 2.7% and the S&P 500 Composite Index increased by 4.0% to reach a new all-time high. However, a reminder that significant uncertainty remains for the global economy was provided by the International Monetary Fund’s (IMF) decision to cut the global growth forecast for 2019 from 3.5% to 3.3%, the lowest forecast since the global financial crisis. Meanwhile, Brexit negotiations continued along tumultuously, receiving a second extension from the European Council until the end of October 2019.
Significant uncertainties in global markets were the leading cause of the Federal Reserve’s (Fed) decision to curb rate hike forecasts as well. Markets have responded in kind, with the Fed’s dovish shift leading to improved market sentiment, as well as providing relief to emerging market economies hurt by the rising US dollar. In Australia, the Reserve Bank of Australia (RBA) has also capitulated by slashing its economic expectations for domestic growth, pushing down the growth forecast for the year to June from 2.5% to 1.7%, which had previously been at a high of 3.25% in November last year, with the market now pricing in two rate cuts within the next year.
Despite the easing monetary policy conditions, global yields increased across the majority of regions, following dramatic falls over the March quarter. Attention in fixed income markets was also placed on the eagerly anticipated Saudi Aramco debut dollar bond offering, attracting ten times the amount offered with as much as $10 billion raised and with yields offered around 3.75%. Global and domestic real estate investment trusts (REITs) suffered off the back of increasing bond yields, with REITs often viewed as an alternative source of income to bonds. Turmoil in Libya, following an assault on the only functioning airport in the country by the Libyan National Army, along with the Venezuelan oil crisis and US sanctions on Iran kept the pressure on oil prices, leading to an increase of 6.3% over April and 37% increase since the end of 2018.
The Australian equity market underperformed its hedged international counterpart, with the S&P/ASX 300 Index increasing 2.5% during April. In sector terms, IT led the Australian equity market, increasing 7.4% over the month, closely followed by Consumer Staples which increased 7.3%. The Australia Government delivered the budget for 2019 in April, projecting an expected return to surplus in an effort to support their appeal in the upcoming election. Concurrently, the Australian CPI figure recorded no movement over the March quarter, as price movements in the basket of goods and services used in CPI calculations were fully offset over the quarter.
- The RBA decided to leave the cash rate unchanged again in its early April meeting at 1.50% per annum (pa), remaining at the same level since August 2016. RBA Governor, Philip Lowe, noted that the outlook for the global economy remains reasonable, however downside risks have increased. In most advanced economies, unemployment is low and wage growth has picked up. The Chinese economy has taken steps to support their economy, with authorities easing policy while also paying attention to risks in the financial sector. There has been a significant increase in employment, however unemployment remains steady at 5%, expected to fall to 4.75% in 2021. Strong employment growth has led to some pick-up in wages growth, further growth is expected to be gradual. The RBA is expecting underlying inflation to be 1.75% this year and 2.0% in 2020. Conditions in Sydney and Melbourne’s housing markets have continued adjusting, after the earlier large build up in prices, while credit conditions for borrowers has tightened. The RBA continues to hold the same stance of a low level of interest rates, recognising that there is still some spare capacity in the economy and that further improvement in the labour market is needed before inflation can reach consistency with the target.
- Australian seasonally adjusted employment increased by 25,700 in March, above expectations for a 15,000 rise while February figures were revised to an increase of 10,700. The unemployment rate increased to 5.0% for March, in line with expectations. The participation rate increased to 65.7%, above expectations for 65.6%. Part time jobs decreased by 22,600 and full time jobs increased by 48,300.
- Australian building approvals decreased 15.5% month-on-month to be down 27.3% for the year to March, compared to previous levels of -19.1% and -12.3% (revised) for respective periods ending February.
- The Institute for Supply Management (ISM) Manufacturing Index recorded 52.8 in April, below consensus for 55.0, and below the 55.3 recorded in March. Of the 18 manufacturing industries, Textile Mills, Electrical Equipment, Appliances and Components and Miscellaneous Manufacturing were the top contributors, while Apparel, Leather and Allied Products, Primary Metals and Wood Products were the top detractors over the month. The ISM Non-Manufacturing Index recorded 55.5 in April, below consensus for 57.0 and below the 56.1 for March. Of the 18 nonmanufacturing industries, the top performers in April were Transportation and Warehousing, Professional, Scientific and Technical Services and Construction.
- US Non-Farm Payrolls increased by 263,000 in April, above the previous 189,000 increase (revised) for March. The unemployment rate decreased to 3.6% over April, from 3.8% in March.
- US gross domestic product (GDP) estimate for Q1 2019 is 3.2% quarter on quarter (QoQ) annualised, above expectations for 2.3%.
- The Caixin Manufacturing purchasing managers’ index (PMI) in China recorded 50.2 in April, below expectations for 50.9. The indicator signalled broadly stable and slightly improving operating conditions in April.
- An advanced estimate of the European Core Consumer Price Index (CPI) increased to 1.2% over the year to April, above expectations for 1.0%.
- The Eurozone composite PMI increased to 51.5 in April, above 51.3 for March, indicating a modest improvement in growth.
- The initial estimate released for Q1 2019 Eurozone seasonally adjusted GDP was 1.2% for year-on-year (YoY) and 0.4% QoQ.
The Australian equity market underperformed its hedged international counterpart index over the month, as the S&P/ASX 300 Index increased 2.5%. The S&P/ASX Small Ordinaries was the strongest relative performer, increasing 4.1%, while the S&P/ ASX 50 was the weakest, increasing 2.1% over the month.
The best performing sectors were IT (+7.4%) and Consumer Staples (+7.3%), while the weakest performing sectors were Materials (-2.1%) and Real Estate (-1.7%). The largest positive contributors to the index return were CBA, Westpac and ANZ, with absolute returns of 5.5%, 6.8% and 5.0% respectively. In contrast, the most significant detractors from performance were BHP, South32 and Scentre Group with absolute returns of -2.5%, -10.0% and -6.6%, respectively.
The broad MSCI World ex Australia (NR) Index increased 3.9% in hedged terms and 4.6% in unhedged terms over the month, as the AUD experienced mixed movements against major developed market currencies.
The strongest performing sectors were Financials (+8.1%) and IT (+7.4%), while Healthcare (-1.7%) and Real Estate (-0.6%) were the worst performers. In AUD terms, the Global Small Cap sector was up 4.1% and Emerging Markets was up 3.0% over April.
Over April, the NASDAQ increased 4.7%, the S&P 500 Composite Index increased by 4.0% and the Dow Jones Industrial Average increased by 2.7%, all in USD terms. In local currency terms, major European equity markets experienced positive returns as the FTSE 100 (UK) increased 2.3%, the CAC 40 (France) increased by 4.9% and the DAX 30 (Germany) also increased by 7.1%. In Asia, the Japanese TOPIX (1.7%) and the Hang Seng (2.3%) increased while the Chinese SSE Composite (-0.4%) and the Indian S&P BSE 500 (-0.1%) decreased over April.
The Real Assets sector was mixed for investors over April. The FTSE Global Core Infrastructure index increased 1.0% while Global Real Estate Investment Trusts (REITs) decreased 1.0% over the month (both in AUD hedged terms). Domestic REITs decreased 2.3% over April, while Australian Direct Property (NAV) returned 0.5% on a one-month lagged basis.
Global bond markets were mixed over April as yields increased across most major regions, while Australian yields experienced modest falls. The Barclays Capital Global Aggregate Bond Index (Hedged) was flat over the month while the FTSE World Government Bond (ex-Australia) Index (Hedged) decreased 0.2%. Ten-year bond yields increased in Germany (+8 basis points (bps) to 0.01%), in the US (+9bps to 2.51%), the UK (+18bps to 1.18%) and in Japan (+5bps to -0.04%). Two-year bond yields experienced positive movements over the month as German bond yields increased (+9bps to -0.58%), along with the UK (+12bps to 0.76%) and Japan (+3bps to -0.15%) while the US (2.29%) remained flat.
Returns for existing domestic bond holders were mostly positive over April, with 10-year yields (+1bps to 1.79%) increasing, whilst five-year yields (-6bps to 1.38%) and two-year yields (-13bps to 1.34%) decreased. Of the Bloomberg Ausbond indices, the Inflation Index produced the highest return, increasing 0.8% over the month, while the Bank Bill Index return was the lowest at 0.2% over the month.
The AUD depreciated against the USD over April, finishing with a Trade Weighted Index of 60.5 on 30 April 2019, same as previous month. The AUD appreciated against the Pound Sterling (+0.4%), remained level with the Japanese Yen and depreciated against the USD (-0.9%) and the Euro (-0.2%). On a trade-weighted basis, the local currency was level over the month.
Iron Ore increased 11.6% over April, finishing the month at $96.5 per metric tonne. The S&P GSCI Commodity Total Return Index increased 3.8% over the month. Gold prices finished the month at US$1,283.06 per ounce, falling 1.0% over the period, while the oil price increased 6.3% to $72.90 per barrel over April.
Source: Mercer LLC