July turned out to be a strong month for global equity markets. The US Federal Reserve continued to emphasise there was little risk of an imminent slowdown in its asset purchasing program, while the results of US and European earnings season were generally positive. Economic data in the US was also encouraging, with a range of manufacturing surveys beating expectations. The ISM manufacturing index was the standout, jumping nearly five points to 55.4 – a level not seen in over two years. Q2 GDP growth also exceeded economists’ expectations, running at an annualised rate of 1.7% in the June quarter. On the downside, despite the Case-Shiller home price index increasing sharply, housing starts and building permits unexpectedly fell, while non-farm payrolls came in lower than expected at 162,000. Despite this, the unemployment rate fell to a four year low of 7.4%.Download
Rob Hogg, Head of our Capital Markets and Asset Allocation Research Team sums up the state of markets for the month.
In June markets saw a continuation of the sell-off that was triggered by comments made by Federal Reserve Chairman Ben Bernanke in May in regard to the potential slowing of the pace of the Fed’s asset purchase program. Both equity and bond markets were sold off as the yield on the US 10 Year Treasury crept higher over the course of the month. The June Federal Open Market Committee (FOMC) meeting fuelled investor anxiety further as the Fed reiterated that the pace of asset purchases may be “moderated” later in the year. The combination of concerns about the timing of QE tapering, an unexpected spike in China’s short term interbank lending rate (SHIBOR) and ongoing uncertainty about future Chinese economic growth resulted in a particularly severe sell-off in emerging market equities and currencies. The Shanghai Composite index finished the month 14% lower while the ASX 300 Accumulation Resource Index, also closely tied to Chinese growth prospects, was down 10.1%.Download
May provided a glimpse into how global capital markets may react to the withdrawal of central bank intervention. Under questioning before the Joint Economic Committee, Federal Reserve Chairman Ben Bernanke said the Fed could slow the pace of its asset purchase program in the next few meetings, if the economic data is sufficiently strong. Markets reacted sharply to the comment. Global equities, which had been steadily climbing prior to Bernanke’s testimony, reversed direction with the Nikkei dropping 7% in its biggest single day’s fall since the 2011 earthquake and tsunami disaster. Global bond yields also sold off although sovereign yields were already on an upward trajectory.Download
Concerns about global growth re-emerged in April following disappointing Chinese GDP data, significant falls in commodity prices and ongoing economic weakness in the Eurozone. Markets reacted accordingly with defensive and higher yield sectors significantly outperforming cyclical and higher growth sectors. This trend was evidenced in the continued outperformance of developed markets relative to emerging markets and, in Australia, the ongoing outperformance of the broader index relative to small caps.Download
In March, we were reminded flare ups in Europe continue to have the capacity to influence markets. The initial deal between the EU/IMF and Cyprus on a EUR10 billion rescue package saw, for the first time, the imposition of losses on bank depositors. The market reaction was what one would expect – significant falls in European equities to reduce gains made earlier in the month and core, safe haven yields declining, while peripheral yields spiked. Marathon negotiations led to a last minute agreement being reached just before the ECB was due to withdraw emergency financial support. The final deal saw the burden of responsibility shift entirely to large depositors who are expected to contribute EUR4.2 billion to the rescue package. In the aftermath, EU officials stressed the terms of the deal with Cyprus were not a blueprint for future financial crises, as feared by some investors. Away from Cyprus, Italian politics remains in a state of limbo after the elections in February with Beppe Grillo’s Five Star Movement ruling out a coalition with either of the major established parties.Download
In February, political events moved to the fore again. An indecisive Italian election outcome unnerved European bond and equity markets, while in the US politicians failed to reach a compromise to avert or delay the so-called “sequester”, $85 billion in automatic spending cuts over the next seven months. US markets, however, shrugged off Washington’s latest deadlock and continued to post gains as Chairman Ben Bernanke reiterated the Federal Reserve’s commitment to quantitative easing, suggesting that investors are currently more concerned with monetary than fiscal policy. Meanwhile the US economy continues to shows signs of progress with the Institute of Supply Management (ISM) survey for February indicating above average production growth, with improvement coming from both current production and the more forward looking new orders survey.Download
January was a month in which it seemed each of the major hurdles were dealt with one by one, at least for now. After the partial resolution of the fiscal cliff early in the New Year, US lawmakers continued the theme of temporary measures by extending the debt ceiling with conditionality to May ahead of further negotiations for a more lasting solution. US earnings season has nearly concluded, with results broadly in line with historical averages, while further evidence of China’s soft landing emerged with the release of Q4 2012 real GDP growth figures. Global equity and bond markets responded as expected. Stock indices across the world generally recorded strong gains, highly rated sovereign yields also edged higher while those in peripheral European nations continued their march downwards. Despite the positives, markets reminded everyone it is hardly smooth sailing ahead. European equities gave up some of their gains later in the month as corruption allegations against the Spanish Prime Minister gained traction and support for Silvio Berlusconi in Italian pre-election polls jumped.Download