October 2017 Monthly Commentary
(Update provided by Willis Towers Watson, legalsuper’s investment asset consultant)
Globally, equity markets performed strongly over October on the back of positive economic data. Media focus over the month was on Spain, after Spanish Prime Minister, Mariano Rajoy, responded to the Catalan declaration of independence by firing the entire Catalan government and disbanding the Catalan parliament. Speculation around President Trump’s nomination for the next chair of the Federal Reserve continued throughout October, with Trump announcing his nomination as current Fed Governor Jerome Powell in early November. Known as a pragmatic centrist, the announcement of Jerome Powell’s nomination is not expected to have major market implications.
US data appeared strong, with leading indicators rebounding following weaker performance over the September quarter, which was dampened by recent US hurricanes. Progress continues towards tax reform with the House of Representatives voting in favour of the 2018 budget which will allow tax reform to proceed without any need for Democratic Party support. The US equity market was positive for October with the S&P 500 Composite returning 2.3% (in USD terms). Builder confidence in the market for newly built, single-family homes, as measured by the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), rose to 68 in October from 64 in September. This was the highest reading since May, as sentiment among home builders recovered from the initial shock of the hurricanes. The Markit Manufacturing PMI for the US increased to 54.6 in October from 53.1 in September.
The ECB announced a further extension of its quantitative easing program at the reduced rate of €30bn a month, from €60bn, starting in January 2018 for nine months and going “beyond, if necessary” with ECB President Draghi saying it won’t stop suddenly next October. The Euro Area’s core inflation reading eased slightly to 0.9% year-on-year for October and headline inflation is expected to have increased 1.4% year-on-year for October, both below the European Central Bank’s target rate of 2.0%. The Markit Eurozone Manufacturing PMI came in at 58.5 in October, up from 58.1 in September. The Eurozone PMI Composite Output Index fell to 55.9 in October, from a four-month high of 56.7 in September. The Eurozone stock market generated a return of 2.2% over the month based on the Euro Stoxx 50 index in local currency terms. On a one year basis, the same index returned 20.3% in local currency terms.
China held their Communist Party Congress in October with President Xi Jinping outlining plans for more focus on quality growth with ongoing reform and more emphasis on reducing pollution and inequality. The Chinese manufacturing PMI, as measured by the Caixin Manufacturing PMI, remained unchanged at 51.0 in October. The Chinese RMB appreciated against the USD over the month by 0.3%, and the Chinese stock market returned 1.3% (in local currency terms), as measured by the Shanghai Composite Index. Over the same period, the MSCI World ex Australia Accumulation Index returned 2.5% in local currency terms, and 4.3% in unhedged AUD terms.
It was a very strong month for Australian markets with Australian equities generating 4.0% for October. The Reserve Bank maintained the cash rate at 1.5% at both its October and November meetings and the RBA is not expected to raise rates until late next year as it is expected to take time for a gradual pick-up in economic growth to flow through to wage growth and higher underlying inflation. The Australian stock market, as measured by the S&P/ASX 300 Accumulation Index, was positive for all sectors over the month of October. The strongest sectors over the month (excluding listed property) were IT (8.4%), Energy (6.4%) and Healthcare (5.5%); while the Industrials (4.2%), Financials (3.3%) and Telecommunications (2.4%) sectors experienced the lowest returns. The Australian listed property market, as measured by the S&P/ASX 300 AREIT Accumulation index, returned 2.2% over October, underperforming the S&P/ASX 300 Accumulation Index by 1.8%.
Movements in bond yields were broadly flat to negative for the month of October. The UK 10-year government bond yield fell by 0.03% to 1.33% and the US 10-year government yield rose by 0.05% to 2.38%. The Australian 10-year government bond yield fell by 0.17% to 2.67% while the German 10-year government bond yield fell by 0.10% to 0.36%.
The Australian dollar weakened against the US dollar, finishing the month at 76.56 US cents, compared to 78.34 US cents at the end of September. The AUD marginally weakened against the currencies of Australia’s major trading partners, as measured by the Trade Weighted Index, which closed the month at 64.9 (down from 66.2 at the end of September).
Note: This investment commentary does not constitute advice. All investment figures quoted relate to before-tax performance of the relevant industry benchmark. © 2017 Willis Towers Watson.