June 2017 Monthly Commentary
(Update provided by Willis Towers Watson, legalsuper’s investment asset consultant)
Markets were broadly flat to negative over the month of June, with global yields rising and equities largely unchanged. Globally, central banks returned to a somewhat hawkish stance over June; in particular the European Central Bank, the Bank of England and the Bank of Canada, all signalled an eventual end to easy monetary policy, while the US Fed raised rates. In the US, the Senate appears close to a vote on a draft Obamacare reform bill, while Trump also released a draft executive order focused on loosening regulations in the health industry, and the Treasury Secretary and House Speaker confirmed that tax reforms remain a top priority for the administration.
The US central bank raised the Federal Funds target range by 0.25% to 1.00%-1.25%, marking the third time in six months that the Fed has raised rates. The US equity market had a negative month with the S&P 500 Composite returning 0.6% (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), fell to 67.0 in June from a downwardly revised 69.0 in May, resulting in the lowest reading in four months. The Markit Manufacturing PMI for the US fell to 52.1 in June from 52.7 in May. This was the lowest reading since September 2016 due to slowing output, new business, and employment growth.
Theresa May’s position as Prime Minister of the UK was substantially weakened as her Conservative Party was only able to retain power through a deal with the Northern Irish Democratic Unionist Party. In contrast, the strong victory of Emmanuel Macron’s En Marche party in the French legislative elections provided the newly elected President, who ran on a pro-reform and pro-EU agenda, with the parliamentary backing to begin implementing this agenda and helped create positive momentum which saw economic confidence in Europe rise to its highest level in a decade by month end. The Eurozone’s core inflation reading was 1.1% year-on-year for June and headline inflation was 1.3% for the year to June which are both well below the European Central Bank’s target rate of 2%. The Markit Eurozone Manufacturing PMI rose to a six-year high of 57.4 in June, from 57.0 in May. The Eurozone PMI Composite Output Index fell to 55.7 in June from a six year high of 56.8 in May, as growth in the service sector declined to a five month low. The Eurozone stock market generated a return of -3.2% over the month based on the Euro Stoxx 50 index in local currency terms. On a one year basis, the same index returned 20.1% in local currency terms.
The inclusion of China A-Shares in MSCI’s benchmarks over the month signals a further step forward in the opening up of the Chinese share market and its global integration. The Chinese manufacturing PMI as measured by Caixin Manufacturing PMI rose to 50.4 in June, from 49.6 in May, due to an increase in new orders and exports. The Chinese RMB appreciated against the USD over the month by 0.5%, and the Chinese stock market returned 2.4% (in local currency terms), as measured by the Shanghai Composite Index. Over the same period, the MSCI World ex Australia Accumulation Index returned 0.0% in local currency terms, and -2.6% in unhedged AUD terms.
In Australia, the South Australian Government followed the Federal Government by including draft legislation in the state budget which proposes major banks pay a quarterly levy 0.015% on bonds and deposits over $250,000. This is currently opposed by the Liberal Opposition and has been labelled an “outrageous cash grab” by the Australian Bankers Association. The Reserve Bank maintained the cash rate at 1.5% at both its June and July meetings. The Australian stock market, as measured by the S&P/ASX 300 Accumulation Index, returned 0.2% over June. The strongest sectors over the month (excluding listed property) were Healthcare (6.1%), Information Technology (1.9%) and Financials (1.7%); while the Consumer Stapes (-2.4%), Utilities (-2.7%), and Energy (-6.8%) sectors experienced negative returns. The Australian listed property market, as measured by the S&P/ASX 300 AREIT Accumulation index, returned -4.5% over June, underperforming theS&P/ASX 300 Accumulation Index by 4.7%.
Hawkish comments from central banks pushed bond yields higher over June. UK and Australian 10-year government bond yields both rose by 0.21%, finishing the month at 1.26% and 2.60% respectively. The German 10-year government bond yield rose by 0.16% to 0.47% and the US 10-year bond yield rose by 0.10%, finishing June at 2.30%.
The Australian dollar strengthened against the US dollar, finishing the month at 76.89 US cents, compared to 74.30 US cents at the end of May. The AUD also appreciated against the currencies of Australia’s major trading partners, as measured by the Trade Weighted Index, which closed the month at 65.5 (up from 63.8 at the end of May).
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.