Monthly market update June '19
June saw a significant reversal of the sell-off in May as all major global equity markets posted positive returns for the month. The US and China reached an agreement at the G20 to continue trade negotiations, which put further tariffs on hold. However, there were still no major developments in reaching a trade deal. Global equity markets priced in potential rate cuts in June as both the Federal Reserve and the European Central Bank indicated fiscal stimulus and looser monetary policy may be required if the economic outlook does not improve. All major government bond yields continued to fall, reinforcing the negative outlook for the global economy. On the domestic front, the RBA announced the first change in rates since August 2016, cutting by 0.25% to 1.25%, and, on the 2nd of July, cut another 0.25% to a new record low of 1.00%.
The G20 meeting between the US and China resulted in a promise of no further tariffs and an easing of restrictions on China’s telecommunications company Huawei, to which the Chinese stock market responded positively, with the Shanghai Composite Index rising by 2.8% for the month of June (in local currency terms). The RMB depreciated against the USD, by 0.6% over the month. The Chinese manufacturing PMI, as measured by the Caixin Manufacturing PMI, reported a weak result for June, as the index fell to 49.4 from 50.2 in May.
US equities recovered in June, with the S&P 500 Composite rising by 7.0% (in local currency terms). The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) fell to 64 in June from 66 in May. The Markit US Manufacturing PMI remained well below early 2019 levels, rising slightly to 50.6 in June from 50.5 the previous month, still indicating weaker growth in the US manufacturing sector. The US manufacturing sector has been predominantly sensitive to lower business investment and ongoing trade disputes. The MSCI World ex Australia Index reversed last month’s weakness by rising 5.9% in June (in local currency terms), whilst the equivalent unhedged AUD index rose by 5.3%, due to the modest appreciation of the Australian dollar.
In Europe, the race for the leadership of the UK’s Conservative Party is well underway, with polls still pointing to Boris Johnson as the favourite to win. The UK’s new prime minister will face the challenge of uniting a parliament that remains divided over Brexit, with only 30% of UK voters supporting leaving the EU without a deal. European equities, as measured by the Euro Stoxx 50 Index, rose by a healthy 5.9% over the month (in local currency terms). The Markit Eurozone Manufacturing PMI decreased slightly for June, to 47.6 from 47.7 in the previous month, however the Eurozone PMI Composite Output Index continued to rise from 51.8 in May to 52.1 in June.
After being a positive outlier in May, the Australian share market lagged global shares in June, but still performed strongly, as reflected by the 3.6% rise in the S&P/ASX 300 Accumulation Index, encouraged by the initial RBA interest rate cut to 1.25% early in June. On the 2nd of July, the RBA further eased monetary policy with another 25 basis points interest rate cut, as it seeks to align inflation with the medium term target, boost growth and lower unemployment. Individual sector returns for June were generally positive, with Materials (6.2%), Industrials (5.6%) and Healthcare (4.4%) being the best performing sectors, whilst Consumer Discretionary (-1.5%) and IT (1.1%) were the worst performing sectors. The Australian listed property market, as measured by the S&P/ASX 300 AREIT Accumulation Index, rose by 4.2%, once again outperforming the S&P/ASX 300 Accumulation Index for the month by 0.6%.
All major global bond yields continued to fall in June, with the US 10-year Government bond yield closing at 2.01%, 12bps lower than at the end of May. The Australian 10-year Government bond yield fell by 14bps to end June at 1.32%, the UK 10-year Government bond yield fell by 5bps to 0.83%, and the 10-year German Government bond yield dived further into negative territory, declining 13 basis points to end the month at -0.33%. Similarly, the 10-year Japanese Government bond yield fell by 6bps to -0.16% in June.
The Australian dollar appreciated by 1.2% against the USD, finishing at 70.20 US cents, up from 69.38 US cents the previous month. The Trade Weighted Index closed at 60.1, up from 60.0 at the end of May, reflecting a slight rise of the AUD against the currencies its major trading partners in June.