Monthly market update October '19
October started off on a negative note, with concerns over slowing global growth, the US/China trade war, Brexit and, later in the month, the calling of a UK general election. Despite the negative start to the month, global equity markets ended the month on a positive note, primarily due to reduced concerns of a global economic recession occurring, supported by broadly stable economic data over the month, and hope of easing geopolitical tensions. The MSCI World ex Australia Index rose by 0.4% (on an unhedged basis) in October, whilst the equivalent hedged AUD index rose by 1.8%, higher due to the appreciation of the Australian dollar. Over the month geopolitical issues continued to dominate the news, however this month it was largely positive; the US and China appear to have reached a mini-trade deal, which is expected to be the first phase of a broader deal, and the UK and the EU have reached a new agreement on a Brexit deal, with Brexit now having been delayed until 31 January 2020 (or potentially earlier if the UK Parliament agrees).
US equity market returns were positive in October, with the S&P 500 Composite returning 2.1% (in local currency terms) driven partly by the new mini-trade deal. The mini-trade deal includes China agreeing to purchase more US agricultural goods, the US suspending the 15 October 2019 tariff hike, but more importantly China making commitments around intellectual property protection. Whether this agreement works will provide a good indicator moving forward regarding the broader arc of the US/China trade war. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) rose to 71 in October, from 68 in September, whilst the Markit US Manufacturing PMI slightly rose over the month, with the index reaching 51.3, from 51.1 in September.
In Europe, Brexit continues to dominate the news in both the UK and EU, with UK Prime Minister Boris Johnson and the EU reaching an agreement on Brexit over the month, which will keep Northern Ireland within the EU single market. However, it is unclear if the deal will pass the UK parliament, as the UK has called a general election, with the outcome of the Brexit deal highly dependent on the make-up of Parliament following the election. As expected, Prime Minister Johnson also reluctantly requested a delay for Brexit (alongside a letter outlining his own objection to an extension) allowing time for the election to take place, which was approved by the EU. The European equity market, as measured by the Euro Stoxx 50 Index, returned 1.0% over the month (in local currency terms). The Markit Eurozone Manufacturing PMI rose to 45.9 in October from 45.7 in September, whilst the Eurozone PMI Composite Output Index also slightly rose to 50.2, from 50.1 in September.
Chinese equities performed positively in October, with the Shanghai Composite Index rising 0.8% for the month (in local currency terms). The Chinese manufacturing PMI, as measured by the Caixin Manufacturing PMI, improved in October to 51.7, from 51.4 in September. The CNY appreciated against the USD over the month increasing by 1.6%, with the latter buying 7.04 CNY.
The Australian equity market ended the month in negative territory, underperforming global equities, as the S&P/ASX 300 Accumulation Index returned -0.4% for October. This was largely due to soft economic data released during the month, with the AIG Australian manufacturing PMI falling to 51.6, from 54.7 in September, and the NAB business confidence index falling to 0 from 1, as well as falls in the banks as ANZ announced disappointing results late in the month. Individual sector performance was mixed for the month with Healthcare (7.3%), Industrials (2.9%) and Utilities (1.2%) the best performing sectors, whilst Consumer Staples (-2.2%), Financials (-2.9%) and Information Technology (-3.2%) were the worst performers. After lowering rates by 0.25% in October, the RBA met at the beginning of November and left the cash rate unchanged at 0.75%, as expected. The Australian listed property market performed positively over the month and rose by 1.4%, as measured by the S&P/ASX 300 AREIT Accumulation Index, outperforming the broader market for the month by 1.7%.
Major global bond yields rose in October, with the US 10-year Government bond yield rising 3bps to finish at 1.69%, whilst the Australian 10-year Government bond yield rose by 12bps to end October at 1.14%, and the 10-year German Government bond yield increased by 16bps to end the month at -0.41%. The UK 10-year Government bond yield rose, by 14bp, to finish at 0.63%, whilst the Italian 10-year Government bond yield rose by 10bps, ending October at 0.92%.
The Australian dollar appreciated by 2.1% against the USD over the month, finishing at 68.94 US cents, up from 67.50 US cents. The Trade Weighted Index closed at 60.0, up from 59.2 at the end of September, reflecting an appreciation of the AUD against the currencies of its major trading partners.
Note: This investment commentary does not constitute advice. All investment figures quoted relate to before-tax performance of the relevant industry benchmark. © 2020 Willis Towers Watson.