Monthly market update July '19

Global equity markets posted slightly positive returns over the month of July, continuing on what has been an incredibly strong 2019 for share markets. The Federal Reserve cut interest rates for the first time since the GFC, whilst Boris Johnson emerged victorious in the race for leadership of the Conservative Party, to become the new Prime Minister of the UK. Domestically, Australian equities continued to rally, while the Australian 10-year Government bond yield continued to fall.|

US equities returns were positive over July, with the S&P 500 Composite rising by 1.4% (in local currency terms). In a move widely expected by markets, the Federal Reserve cut interest rates by 25bps to a target range of 2% to 2.25% when they met at the end of the month, in an attempt to kick start the slowing US economy. Chairman Jerome Powell made it clear, however, that the Fed were currently positioning this move as a “mid-cycle adjustment”, rather than the beginning of a series of rate cuts, although he did still leave the door open for another cut later in the year. 

The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) rose to 65 in July, from 64 in June, whilst the Markit US Manufacturing PMI declined further from early 2019 levels, with the index falling to 50.4, from 50.6 the previous month. The MSCI World ex Australia Index rose by 1.2% in July (in local currency terms), whilst the equivalent unhedged AUD index rose by 2.3%, due to the depreciation of the Australian dollar.

July was yet another busy month for European politics, with nominations for important positions in the European Central Bank being decided and Boris Johnson being appointed as the new Prime Minister of the UK. While Johnson has flagged the potential of a no-deal Brexit occurring at the end of October, this is still not the most likely outcome. European equities, as measured by the Euro Stoxx 50 Index, fell by 0.2% over the month (in local currency terms). The Markit Eurozone Manufacturing PMI deteriorated further to 46.5 in July, from 47.6 the previous month, whilst the Eurozone PMI Composite Output Index also declined to 51.5, from 52.2 in June.

China’s economic results for the second quarter were released in July, indicating that economic growth (6.2% year-on-year) had fallen to its lowest level since 1992, amidst the ongoing trade uncertainty that continues to hurt the economy. The Chinese stock market performed poorly in July, with the Shanghai Composite Index falling 1.6% for the month (in local currency terms). Furthermore, at the beginning of August, President Trump declared that he would impose a 10% tariff on the remaining US$300 billion of consumer goods from China which had not yet been impacted by tariffs, as the countries struggle to find a resolution to trade talks, resulting in a hit to equity markets. The Chinese manufacturing PMI, as measured by the Caixin Manufacturing PMI, remained marginally in contractionary territory in July, despite rising slightly to 49.9 over the month, from 49.4. The RMB also depreciated against the USD over the month, falling by 0.3%.

The Australian stock market continued to perform strongly in July, again outperforming global shares, as the S&P/ASX 300 Accumulation Index rose by 3.0%. Individual sector returns for the month were all positive, with Consumer Staples (9.6%), Healthcare (6.0%) and Information Technology (5.1%) the best performing sectors, whilst Financials (1.8%), Energy (1.5%) and Materials (1.2%) were the worst performing sectors. Following two consecutive months of rate cuts, which took the cash rate to a record low of 1%, the RBA kept rates on hold, as expected, when they met in early August. Despite this, the slowing domestic economy, lagging inflation and weak wage growth continue to cause concern for investors, and market participants have already priced in at least one more rate cut by the end of the year. 

The Australian listed property market, as measured by the S&P/ASX 300 AREIT Accumulation Index, rose by 2.6%, underperforming the broader market for the month by 0.4%. 

Major global bond yields continued to decline in July, with the exception of the US 10-year Government bond yield and the Japanese 10-year Government bond yield, which were both relatively flat month-to-month and finished at 2.01% and -0.15% respectively. The Australian 10-year Government bond yield fell by 14bps to end July at 1.19%, the UK 10-year Government bond yield fell by 22bps to 0.61%, and the 10-year German Government bond yield dived further into negative territory, declining 11bps to end the month at -0.44%. 

The Australian dollar depreciated by 2.5% against the USD over the month, finishing at 68.45 US cents, down from 70.20 US cents. The Trade Weighted Index closed at 59.5, down from 60.1 at the end of June, reflecting a depreciation of the AUD against the currencies of its major trading partners.