June 2018 Monthly Commentary
(Update provided by Willis Towers Watson, legalsuper’s investment asset consultant)
Geopolitical tensions were again the theme of the month, but despite this most developed equity markets experienced slight gains in June (in local currency terms), albeit emerging markets saw negative returns. The major talking point of the month was the North Korea-United States summit in Singapore, where President Trump and Kim Jong Un met for the first time and signed an agreement, committing to “join their efforts to build a lasting and stable peace regime on the Korean peninsula”. Time will tell whether the deal results in meaningful change. US trade tariffs continued to impact global markets, with ongoing trade war dialogue between the US and China, as well as the implementation of retaliatory tariffs from the EU, Mexico and Canada, in response to the US’s steel and aluminium tariffs. The Australia dollar depreciated over the course of the month against the Trade Weighted Index and, more significantly, against the USD.
The Federal Reserve met in June and, as expected, increased the interest rate target to a range of 1.75% to 2.0%. This was the second rate rise of the now four predicted for the year, amidst a maturing US economy where fundamentals remain strong. The US stock market, as measured by the S&P 500 Composite, returned 0.6% (in local currency terms) for the month. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) fell to 68 in June, from 70 in May. The Markit US Manufacturing PMI fell to 55.4 in June (from 56.4), a result that went against market expectations.
The European Central Bank again left interest rates unchanged and confirmed its intention to subside its quantitative easing program at the end of December this year “subject to incoming data”. The Euro Stoxx 50 Index fell 0.3% in local currency terms over the month, as Italy continued to provide the bloc with volatility amid policy concerns post their election. The Markit Eurozone Manufacturing PMI fell for the sixth consecutive month to 54.9, down from 55.5 in May, however the Eurozone PMI Composite Output Index unexpectedly rose over the month to 54.8, from 54.1 in May.
While the Chinese manufacturing PMI, as measured by the Caixin Manufacturing PMI, was broadly stable at 51.0 (May’s reading was 51.1). Chinese markets were impacted by slowing growth signals and the growing threat of a trade war. eHowever, The Chinese RMB depreciated against the USD over the month by 3.3% and the Chinese stock market returned -8.0% (in local currency terms), as measured by the Shanghai Composite Index. Falls in China. This, along with tightening USD liquidity, impacted emerging market equities which fell by 2.5% over the month (as measured by the MSCI Emerging Markets Index in local currency terms). Over the same period, the MSCI World ex Australia Accumulation Index returned 0.2% in local currency terms, but returned 2.3% in unhedged AUD terms due to the weakening of the AUD, particularly against the USD and the euro.
In Australia, the RBA again kept the cash rate unchanged at 1.5% as the Australian stock market, measured by the S&P/ASX 300 Accumulation Index, returned a strong 3.2% for the month. Over the month, most sectors experienced positive returns with the strongest sectors being Energy (7.7%), Consumer Staples (5.9%) and Utilities (5.9%); while Materials (1.7%), Industrials (0.6%), and Telecommunication Services (-5.5%) experienced the lowest returns. The Australian listed property market, as measured by the S&P/ASX 300 AREIT Accumulation Index, returned 2.3% in June, underperforming the S&P/ASX 300 Accumulation Index by 0.9%.
Bond yields were largely flat in June as the US 10-year government bond remained at 2.86%, the Australian 10-year government bond yield decreased slightly by 4bps to 2.63% and the UK 10-year government bond yield rose by 5bps to 1.28%. There was again significant bond volatility in Italy over the month, however, yields did decline by 11bps to 2.68% from 2.79% at the end of May. The 10-year German government bond again reduced, this month by 4bps to 0.30% at month end.
The Australian dollar depreciated against the US dollar, finishing the month at 74.05 US cents, compared to 75.68 US cents at the end of May. The AUD also weakened against the currencies of Australia’s major trading partners, as measured by the TWI, which closed the month at 62.6 (down from 62.8).