Quarterly market and economic update | September 2016

Market Commentary

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

Economic Update

Three months on from the historic vote by the British electorate to exit the EU, the world economy has shrugged off the result and we are pretty much in the same position as we were prior to the referendum.

After the initial shock and subsequent volatility and expected sell-off, markets returned to a more considered approach.

Global markets are now looking to gain some momentum in the final stages of the year. Heading into 2017, 
The Reserve Bank of Australia (RBA) cut rates a further 25 basis points to 1.50 per cent during the quarter. At the time of writing, new governor Dr Phil Lowe took over the reins from recently retired Glenn Stevens.

The September quarter headline CPI rose by 0.7% taking the annual growth rate over the past year to just 1.3%. 
September quarter real GDP at the time of writing fell -0.5% - only the fourth time since 1991 we have experienced negative growth.

Globally, economies continue to muddle their way through although accommodating monetary policy remains.

In the US, the FOMC held the Fed Fund's target rate unchanged throughout the quarter at 0.25% to 0.50%.

The US economy barely grew again during the quarter however it is growing fast enough for many to believe a rate rise is all but guaranteed at the December meeting.

The European Central Bank (ECB) as expected, did not make any changes to policy. Eurozone recovery is ongoing however remains fragile and momentum remains subdued.

The Bank of England (BoE) also left policy unchanged during the quarter. A broader easing package was announced in August and the timing of the UK’s exit from the EU has been firmed up.

The Bank of Japan (BoJ) announced it would be conducting a 'comprehensive assessment' of the economy and its policy regime.

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

Equity Markets

Most global markets rebounded strongly in the September quarter recouping the majority if not all of the losses caused by the result of the UK referendum. Generally, it was a positive quarter for financial markets although there were some hiccups along the way.

The Australian equity market (represented by the S&P/ASX 300 Accumulation Index) rose by 5.1%, a good start to the new financial year. Most gains in July came off the back of the Brexit rebound - Australian equities continue to remain expensive both on an absolute and relative basis.

Global equities - a generally positive quarter for equities markets after they recovered from the knee-jerk reactions of Brexit. Commodity markets also stabilised and central bank policy continued to be accommodating.

The MSCI World ex Australian Index returned 1.95% in AUD for the quarter and 1.95% for the year.

In the US, the S&P 500 Index rose 1.46%, the Dow Jones lost -0.73% and the NASDAQ gained a healthy 8.06%.

European equities were supported by an encouraging reporting season. Germany’s DAX returned (8.5%), France (CAC) gained (5.0%) while Spain rose a healthy (7.3%).

The FTSE All-Share index delivered a solid total return of 5.9% for the quarter off the back of a weaker British pound.

Japanese equities were the strongest in the region off the back of a depreciating Yen. The Nikkei 225 gaining 5.7%.

In China, the Shanghai Shenzhen CSI 300 Index was also one of the strongest performers in the region gaining 3.2% in local currency.

Global bonds

The 10-year US Treasury yield gained 12 basis points to finish the quarter at 1.60%. This came off the back of economic momentum and brought an imminent rise in the Fed rate.

The extension of policy accommodation by the BoE in August pressed gilt yields lower - the 10-year gilt yield fell from 0.87% to 0.78%.

10-year Australian bond yields fell 7 basis points over the quarter to end at 1.91%

In summary, major headwinds which prevail are:

  1. US monetary policy
  2. Currency – potential currency war
  3. Oil supply and general commodity prices
  4. Geopolitical risks – What will Trump do?
  5. Brexit – how will this affect Australia and the rest of the world from a trade perspective.

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