Global equities rebounded in June following the sharp sell-off in May, with overseas developed shares rising 5.9% in hedged terms. Progress on trade talks and strong indications from central banks to move to more accommodative monetary policy supported the risk-on environment for investors.
The strongest performing sectors globally were Materials (+9.3%) and IT (+7.3%), with US equities also providing strong support, as the S&P 500 rose 7.0% (in USD terms) to a new record high. fixed income and real assets also provided positive returns as the prevailing sentiment from central banks drove a fall in yields.
Trade negotiations continued over June, as all parties affected by the aggressive shift in US foreign policy attempted to navigate through the murky waters towards a solution. Positive developments occurred between the US and Mexico, as President Trump agreed to delay tariff implementation, while developments between the US and China remained stalled. However, optimism engulfed the G-20 Summit at the end of the month, which allowed the US and China to make some breakthroughs, moving closer towards a deal. President Trump also paid a visit to the United Kingdom over the month, expressing interest in their relationship.
Inflation, or lack thereof, remains a key concern for a number of central banks across the globe. The Federal Reserve (Fed) continually relayed out dovish signals through key personnel, including Fed members James Bullard, Fed Chair Jerome Powell and Chicago President Charles Evans. The outlying rhetoric points to a likely rate cut in the near term. Europe expressed intent to approach the issue in a similar manner, with the President of the European Central Bank, Mario Draghi, confirming that they will also likely be pursing stimulatory measures in the near term. To cap it all off, the Reserve Bank of Australia (RBA) cut rates again in its early July meeting, from 1.25% to 1.00%, a new record low.
Other key developments affecting markets over the month included the escalating tension between the US and Iran, following an attack on an oil tanker as well as the shooting down of a US drone. These conflicts spilled over into the oil markets, as the price of oil had appeared to be trending down prior to these events, following pressure from the US to curb prices. Tension also erupted for China following the protests against new extradition laws in Hong Kong, with around two million people flooding the streets to voice their opposition to the proposal.
The Australian equity market underperformed its international counterpart over the month, as the S&P/ASX 300 Index increased 3.6%. In sector terms, Materials led the Australian equity market, increasing 6.2%, whilst Consumer Discretionary (-1.5%) and IT (+1.1%) were the worst performing sectors.
- The RBA decided to lower the cash rate by another 25 basis points in its early July meeting to 1.00% per annum (pa), reaching a new all-time low. Key considerations in making this decision were in the interest of supporting employment growth and providing greater confidence that inflation will remain consistent with the medium-term target. RBA Governor, Philip Lowe, noted that the outlook for the global economy remains reasonable, however downside risks have increased due to trade disputes and the slowdown in international trade has contributed to slower growth in Asia.
- Employment growth has been strong over the past year, despite the unemployment rate recently rising slightly to 5.2%, and this growth has also led to some pick up in wage growth in the private sector. Inflation pressures remain subdued however, inflation is anticipated to pick up in the June quarter. The RBA estimates underlying inflation to be around 2% in 2020 and to move slightly higher after that. There are tentative signs that house prices are now stabilising in Sydney and Melbourne, with credit conditions also stabilising. The decision to lower the cash rate to 1.00% is aimed at filling the spare capacity within the economy, assisting in reducing unemployment and providing more stable progress towards the inflation target.
- Australian seasonally adjusted employment increased by 42,300 in May, above expectations for a 16,000 rise while April figures were revised to an increase of 43,100. The unemployment rate remained at 5.2% for May, above expectations of 5.1%. The participation rate increased to 66.0%, above expectations for 65.8%. Part time jobs increased by 39,800 and full time jobs increased by 2,400.
- Australian building approvals increased 0.7% month-on-month to be down 19.6% for the year to May, compared to previous levels of -3.4% and -23.4% (revised) for respective periods ending April.
- The Institute for Supply Management (ISM) Manufacturing Index recorded 51.7 in June, above consensus for 51.0, and below the 52.1 recorded in May. Of the 18 manufacturing industries, Furniture and Related Products, Printing and Related Support Activities and Textile Mills were the top contributors, while Apparel, Leather and Allied Products, Primary Metals and Wood Products were the top detractors over the month. The ISM NonManufacturing Index recorded 55.1 in June, below consensus for 56.0 and below the 56.9 for May. Of the 18 non-manufacturing industries, the top performers in June were Real Estate, Rental & Leasing, Other Services and Finance & Insurance. The only industry reporting a decrease was Arts, Entertainment and Recreation.
- in June, above the previous 72,000 increase (revised) for May. The unemployment rate increased to 3.7% over June.
- US gross domestic product (GDP) third estimate for Q1 2019 is 3.1% quarter on quarter (QoQ) annualised, below expectations for 3.2%.
- The Caixin Manufacturing purchasing managers’ index (PMI) in China recorded 49.4 in June, below expectations for 50.1. The indicator signalled a marginal deterioration in operating conditions in June.
- An advanced estimate of the European Core Consumer Price Index (CPI) recorded 1.1% over the year to June, above expectations for 1.0%.
- The Eurozone composite PMI increased to 52.2 in June, above 51.8 for May, highest recorded since November 2018.
- The revised 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 3.6%. The S&P/ASX 50 was the strongest relative performer, increasing 4.2%, while the S&P/ASX Small Ordinaries was the weakest, increasing 0.9% over the month.
The best performing sectors were Materials (+6.2%) and Industrials (+5.6%), while the weakest performing sectors were Consumer Discretionary (-1.5%) and IT (+1.1%). The largest positive contributors to the index return were BHP, CBA and CSL, with absolute returns of 9.4%, 5.4% and 4.7% respectively. In contrast, the most significant detractors from performance were Vocus Group, Wesfarmers and Challenger with absolute returns of -28.6%, -2.0% and -17.3%, respectively.
The broad MSCI World ex Australia (NR) Index increased 5.9% in hedged terms and 5.3% in unhedged terms over the month, as the Australian dollar (AUD) appreciated against most major developed market currencies.
The strongest performing sectors were Materials (+9.3%) and IT (+7.3%), while Real Estate (+0.6%) and Utilities (+2.4%) were the worst performers. In AUD terms, the Global Small Cap sector was up 4.5% and Emerging Markets was up 4.9% over June.
Over June, the NASDAQ increased 7.4%, the S&P 500 Composite Index increased by 7.0% and the Dow Jones Industrial Average increased by 7.3%, all in USD terms. In local currency terms, major European equity markets also experienced positive returns as the FTSE 100 (UK) increased 4.0%, the CAC 40 (France) increased by 6.8% and the DAX 30 (Germany) also increased by 5.7%. In Asia, the Japanese TOPIX (+2.8%), the Hang Seng (+6.7%) and the Chinese SSE Composite (+2.8%) all increased, while the Indian S&P BSE 500 (-1.5%) decreased over June.
The Real Assets sector was positive for investors over June. The FTSE Global Core Infrastructure index increased 3.2% and the Global Real Estate Investment Trusts (REITs) increased by 1.0% over the month (both in AUD hedged terms). Domestic REITs increased 4.2% over June, while Australian Direct Property (NAV) returned 0.3% on a one month lagged basis.
Global bond markets were positive over June as yields decreased across most major regions. The Barclays Capital Global Aggregate Bond Index (Hedged) increased 1.3% over the month and the FTSE World Government Bond (ex-Australia) Index (Hedged) also increased 1.3%. Ten-year bond yields decreased in Germany (-13 basis points (bps) to -0.32%), in the US (-14bps to 2.00%), the UK (-6bps to 0.84%) and in Japan (-7bps to -0.16%). Two-year bond yields also experienced negative movements over the month as German bond yields decreased (-7bps to -0.74%), along with the US (-24bps to 1.76%) and Japan (-5bps to -0.22%) while yields for the UK (+2bps to 0.62%) increased.
Returns for existing domestic bond holders were positive over June, with 10-year yields (-14bps to 1.32%), five-year yields (-14bps to 1.03%) and two-year yields (-14bps to 0.98%) all decreasing. Of the Bloomberg Ausbond indices, the Treasury and Semi-Government Indices produced the highest returns, both increasing 1.1% over the month, while the Bank Bill Index return was 0.1% over the month.
The AUD appreciated against the USD over June, finishing with a Trade Weighted Index of 60.1 on 30 June 2019, up 0.2% from the previous month. The AUD appreciated against the Pound Sterling (+0.9%), the Japanese Yen (+0.3%) and the USD (+1.3%) whilst it depreciated against the Euro (-0.7%).
Iron Ore increased 10.4% over June, finishing the month at $116.5 per metric tonne. The S&P GSCI Commodity Total Return Index increased 3.1% over the month. Gold prices finished the month at US$1,412.30 per ounce, increasing 8.6% over the period, while the oil price increased 3.0% to $66.87 per barrel over June.
Source: Mercer LLC