Quarterly market and economic update | June 2016

Market Commentary

by Theodore Hatsis CIMA®, Head of Research, Centrepoint Alliance

Economic Update

What an end to the financial year! Just as the calendar year kicked off with a bang with global markets reeling in the wake of China growth concerns, the lead up to the end of the financial year provided just as much tension as speculation grew of a possible global meltdown should Britain exit the European Union (EU).

The British electorate did end up voting in favour of ending their 40plus year relationship with the EU, which saw global indices hammered and the British pound falling to its lowest level in 30 years relative to the US dollar.

During the June quarter, the Reserve Bank of Australia (RBA) cut rates further - below 2 per cent for the first time in history off the back of the lowest CPI figures since 2012. At the time of writing, the official cash rate stood at 1.50%.

The June quarter headline CPI, rose by 0.4% taking the annual growth rate over the past year to just 1.0%. June quarter real GDP rose by 0.5% taking the annual growth to a now healthy stance of 3.3%, and globally, economies continue to muddle their way through. 

In the US, the FOMC held the Fed Funds target rate unchanged throughout the quarter at 0.25% to 0.50%. The US economy is however barely growing.

The European Central Bank (ECB) as expected, did not make any changes to policy.

The Bank of England (BoE) also left policy unchanged during the quarter however, at the time of writing, did announce a broad easing package.

The Bank of Japan (BoJ) left policy unchanged, continuing to view the economy as being on a, “moderate expanding trend”.

In summary; monetary policies globally remain very accommodative, however global growth remains below trend.

Equity Markets

The year began in chaos with global markets being sold-off heavily due to China growth concerns, and ended in chaos as the implications of Brexit were realised. Overall, the June quarter proved quite eventful.

The Australian equity market (represented by the S&P/ASX 300 Accumulation Index) finished off a volatile and lacklustre year with a quarterly gain of 4.0% bringing the twelve gain to a moderate 0.9%. Australian equities continue to remain expensive both on an absolute and relative basis. 

Global equities made a confident start to the June quarter although the UK’s vote to leave the EU overshadowed other developments by the end of the period. The MSCI World ex Australian Index returned 4.01% in AUD for the quarter and 0.16% for the financial year. 

In the US, all US equity indices ended the quarter in positive territory. The S&P 500 Index rose 3.64%, the Dow Jones increased by 4.19% and the NASDAQ gained 1.04%.

As expected, European equites were dominated by the British referendum and declined in the second quarter with the MSCI EMU index returning -2.2%.

The FTSE All-Share index delivered a total return of 4.7% for the quarter. In Japan, Japanese equities off the back of a poor opening quarter, fell sharply again, as the Nikkei 225 fell by -6.8%.

In China, Shanghai Shenzhen CSI 300 Index lost -2.1% in local currency during the quarter helped somewhat by an improved outlook.

Global bonds

10-year US Treasury yields also fell albeit not as sharply relative to the UK dropping from 1.77% to 1.47%.

The Australian Commonwealth Government Securities (CGS) also fell quite significantly. 10-year government bond yields fell by 0.51% to 1.98%.
In summary; Major headwinds which we continue to see are:

  1. US monetary policy
  2. Currency – another round of wars has begun
  3. Oil and general commodity prices
  4. Geopolitical risks
  5. Brexit – how will this affect Australia and the rest of the world from a trade perspective.

Sources:

Reserve Bank of Australia, International Monetary Fund, CBA Global Markets Research, Bloomberg, Schroders Investment Management, PIMCO

For more information or assistance please do not hesitate to contact Theodore Hatsis, Head of Research.