Monthly market update August '19

August was a rocky month for global equity markets, with all major global equity markets falling. The month was dominated by political uncertainty, with the US-China trade war escalating yet again as the US increases tariffs and the outcome of Brexit remaining uncertain despite the looming deadline. In the face of this continued political uncertainty and the weakening global economy, central banks have become more dovish, with the Federal Reserve and European Central Bank indicating they are ready to cut rates further. Domestically, Australian equities ended the month in negative territory, whilst the 10-year Government bond yield fell again, in line with bonds globally.

US equity market returns were negative over August, with the S&P 500 Composite returning -1.7% (in local currency terms). While the Federal Reserve did not meet this month, Chairman Jerome Powell indicated, based on the increasing US-China tensions and continued slow-down in global growth, that further cuts to the federal funds rate are possible later this year. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) rose to 66 in August, from 65 in July, whilst the Markit US Manufacturing PMI declined marginally in August, with the index falling to 50.3, from 50.4 in July. The MSCI World ex Australia Index fell by 1.9% (in local currency terms) in August, whilst the equivalent unhedged AUD index rose by 0.3%, due to the depreciation of the Australian dollar.

In Europe, Brexit remains an issue and continues to escalate as Prime Minister Johnson suspended the UK parliament between 10th of September to the 14th of October. Whilst Johnson remains determined for Brexit to happen on the 31st of October deadline (with or without a deal), he has now lost the support of many of his Conservative Party colleagues, with a general election in October now a distinct possibility. The European equity market, as measured by the Euro Stoxx 50 Index, fell by 1.2% over the month (in local currency terms). The Markit Eurozone Manufacturing PMI slightly improved to 47.0 in August, from 46.5 in July, whilst the Eurozone PMI Composite Output Index also rose to 51.9, from 51.5 the previous month.

The Chinese equity market also performed poorly in August, with the Shanghai Composite Index falling 1.6% for the month (in local currency terms) primarily driven by the continued US-China trade tensions. In late August, President Trump announced that the US will be increasing current tariffs on USD $250 billion worth of goods from 25% to 30%, and increasing new tariffs from 10% to 15%. Negotiations are expected to continue in September, although any resolution soon continues to look unlikely, with investors increasing concerned about its impact on the global economy. The Chinese manufacturing PMI, as measured by the Caixin Manufacturing PMI, improved in August to 50.4, from 49.9 in July. However, the RMB depreciated heavily against the USD over the month, falling by 3.8%.

The Australian equity market went backwards in August, underperforming the global equity market, as the S&P/ASX 300 Accumulation Index fell by 2.3%. The majority of individual sector returns for the month were in negative territory, with Healthcare (3.4%), Information Technology (0.7%) and Consumer (0.6%) the best performing sectors, whilst Telecommunications (-3.2%), Energy (-5.6%) and Materials (-7.3%) were the worst performers. August was earnings reporting season, which saw a broad weakness in company earnings and saw a higher than usual number of companies cutting dividends. However, despite the soft earnings results, the main driver of the negative performance of the Australian stock market appears to be due to the US-China trade war. The RBA did not make further cuts to the cash rate when they met in early September, although at least one cut is still expected by market participants before the end of the year. The Australian listed property market, as measured by the S&P/ASX 300 AREIT Accumulation Index, rose by 1.3%, outperforming the broader market for the month by 3.6%.

Major global bond yields continued to decline in August, with US and Italian bonds declining the most over the month. The US 10-year Government bond yield finished at 1.50% (from 2.01% in July), whilst the Italian 10-year Government bond yield ended at 1.00% (from 1.54% in July). The Australian 10-year Government bond yield fell by 30bps to end August at 0.89%, the UK 10-year Government bond yield fell by 13bps to 0.48%, and the 10-year German Government bond yield continued to dive further into negative territory, declining 26bps to end the month at -0.70%.

The Australian dollar depreciated by 1.6% against the USD over the month, finishing at 67.33 US cents, down from 68.45 US cents. The Trade Weighted Index closed at 58.9, down from 59.5 at the end of July, reflecting a depreciation of the AUD against the currencies of its major trading partners.