February 2017 Monthly Commentary
(Update provided by Willis Towers Watson, legalsuper’s investment asset consultant)
February 2017 Monthly Commentary
While financial markets seemed to hang on the every word of US President Donald Trump, the overarching economic sentiment over the month of February was generally positive. In particular, the US stock market continued to rally, with the Dow Jones Industrial Average surging upward in a consecutive streak of all-time highs.
In the US, builder confidence in the market for newly built, single-family homes, measured by the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) fell to 65.0 in February from 67.0 in January. The Markit Manufacturing PMI for the US fell to 54.2 from 55.0 in the previous month. While production eased slightly from January’s 22 month high, on account of subdued export sales and increasing cost inflation, growth in domestic demand largely offset these drags.
The European Central Bank (ECB) remains committed to quantitative easing to the end of the year at €60bn a month. The Eurozone’s core inflation reading remained constant at 0.9% year-on-year for February, which is still well below the ECB’s target of 2%. Headline CPI increased to 2.0% for the year to February. The Markit Eurozone Manufacturing PMI came in at 55.4 in February, increasing from 55.2 in the previous month, which was the strongest expansion in factory activity since April 2011. The Eurozone PMI Composite Output Index rose to 56.0 in February from 54.4 in January, which was an almost six year high as both services and marketing expanded. The Eurozone stock market returned 2.9% over the month based on the Euro Stoxx 50 index in local currency terms. On a one year basis, the same index returned 16.1% in local currency terms.
The Chinese manufacturing PMI as measured by Caixin Manufacturing PMI rose to 51.7 in February, from 51.0 in January, which now marks eight months of consecutive growth. The Chinese RMB appreciated against the USD over the month by 0.2%, and the Chinese stock market generated a positive return of 2.6% (in local currency terms), as measured by the Shanghai Composite Index. Over the same period, the MSCI World ex Australia Accumulation Index returned 3.1% in local currency terms, and 1.5% in unhedged Australian dollar terms.
In Australia, the Board of the Reserve Bank of Australia (RBA) met in early February and discussed December data, updated forecasts, and assessed the broader market risks affecting their forecasts. The Board felt that maintaining the cash rate unchanged at 1.5% was consistent with creating sustainable growth and inflation conditions. Despite growth predictions, forecasted annual inflation for the end of March is unchanged at 1.5% year on year, below the RBA’s target of 2-3%.
The Australian Industry Group (AIG) PMI data increased by 8.1 points to 59.3 in February, the highest reading in since May 2002, as almost all sub-indexes (exports, production, new order, sales, employment, and supplier deliveries) experienced gains, while only inventories contracted over the month. The Australian stock market, as measured by the S&P/ASX 300 Accumulation Index, returned 2.2% over February. The strongest sectors over the month (excluding listed property) were Consumer Staples (6.0%), Financials (4.1%) and Healthcare (3.9%); while the Energy (-2.1%), Telecommunications (-3.1%), and Materials (-3.2%) sectors were the worst performing sectors. The Australian listed property market, as measured by the S&P/ASX 300 AREIT Accumulation index, returned 4.1% over February, outperforming the S&P/ASX 300 Accumulation Index by 1.9%.
UK and German 10-year government bond yields fell by 0.27% and 0.23% respectively, finishing the month at 1.15% and 0.21%. The Australian 10-year government bond yield increased by 0.01% to 2.72%, and the US 10-year bond yield finished at 2.39% with a 0.06% decrease from the previous month.
The Australian dollar strengthened against the US dollar, finishing the month at 76.57 US cents; compared to 75.85 US cents at the end of January. The AUD appreciated modestly against the currencies of Australia’s major trading partners, as measured by the Trade Weighted Index, which closed the month at 66.7 (up from 65.8 at the end of January).