Market Watch. July Review Global economic outlook. Australia

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1 Market Watch Latest monthly commentary from the Investment Markets Research team at BT. Global economic outlook Australia Available data for the June quarter is consistent with a moderation in GDP growth following the stronger-than-expected March quarter. This is mainly due to net exports making a smaller contribution to growth, however other indicators have softened of late. Employment growth weakened in June in year-ended terms. In contrast, June survey measures of business conditions remained noticeably above long-run averages, while business credit growth continued to strengthen. The Reserve Bank of Australia (RBA) held rates steady in July, judging that holding monetary policy steady would be the most prudent course of action. Recent inflation expectations remain below average. July Review INSIDE THIS ISSUE Global economic outlook Australia Japan United States China UK Eurozone 2 Asset class outlook Australian Shares International Shares Australian Fixed Interest International Fixed Interest Property and REITS Commodities Japan The Bank of Japan released its Q2 Tankan survey of Japanese business, which showed conditions stabilised at a low level during the quarter after a weak March reading. Conditions in the manufacturing sector were ahead of market expectations, with the large manufacturers index holding steady at 6, while the forwardlooking forecast index rose to a level of 6 in Q2, from a level of 3 in Q1. Industrial production declined 2.3% in May as a drop in exports hit most of the country s manufacturing sectors. 1

2 United States The US economy appeared to rebound strongly in June, with non-farm payrolls rising by 287k, taking the three-month rolling average gain to ~150k. The unemployment rate rose to 4.9% from 4.7%, but this was off the back of a pickup in the participation rate. Activity in the manufacturing sector reached its highest level since early 2014, with the Institute of Supply Management manufacturing index coming in at Retail sales rose 0.6% in June, ahead of expectations and taking three-month annualised growth to its highest level in over two years. Industrial production was also better than expected, aided in part by warmer weather which caused a surge in utility output. The Federal Reserve Bank of Atlanta s GDPNow model forecast suggests Q real GDP growth will come in around 2.5% in annualised terms. Inflation pressures remain relatively contained and core consumer price inflation (CPI) remained steady at 2.3% in year-ended terms. Non-farm Payrolls Actual 3mma China Data released in June was broadly ahead of expectations, suggesting that growth stabilised in the second quarter of Real GDP increased 6.7% over the year to the June quarter, with the National Bureau of Statistics of China commenting that consumption contributed 73% to growth in the first half of 2016, up from 60% a year ago. Industrial production and retail sales came in ahead of expectations in June, while fixed asset investment grew more slowly than expected. Meanwhile, credit growth reaccelerated in June after a soft patch in the last two months. Producer price deflation eased for the sixth straight month, with the 2.6% decline the smallest since late UK In the UK, the Bank of England decided to leave rates unchanged at its July meeting, but acknowledged that monetary policy would probably be loosened in August. 2

3 Eurozone Manufacturing activity in Europe improved in the lead up to Brexit, with the June Purchasing Managers Index (PMI) picking up across the Eurozone. The June quarter bank lending survey also showed a further improvement in loan supply conditions for businesses and households, as well as a continued increase in loan demand. The Eurozone returned to positive headline inflation in June after four months of falling prices, rising to 0.1% year-onyear in June from -0.1% in May. CPI Inflation (% yoy) Headline Core Asset class outlook What s been happening in the Markets? Benchmark performance to end of June

4 Australian Shares June was a negative month for Australian shares following strong returns earlier in the year. The ASX200 lost 2.4% for the month, underperforming the broader Morgan Stanley Capital International (MSCI) World Index (when hedged, -1.15%) and Australian Small Caps (- 1.31%). On a sector level, Utilities (+6.2%), and Materials (+0.3%) were the best performing sectors, while Technology (-7.8%) and Financials (-4.2%) were the hardest hit. Markets were surprised by Brexit early in the month, as well as generally higher event risk, with defensive sectors such as Utilities and Telecoms outperforming the broader ASX200 as a result. Performance of the S&P/ASX200 Index to end June 2016 International Shares Most international share markets posted negative returns in June. Share markets were jolted after the UK referendum vote on 23 June which saw UK voters opt to leave the European Union, a move known as Brexit. After a steep sell-off following the vote, markets began to claw back some of the losses as the month came to a close. Globally, the energy sector rallied during the month as oil prices climbed due in part to slightly constricting supply after disruptions in Canada and Nigeria. From an Australian investors perspective, International Shares only outperformed the domestic market on a hedged (-1.1%) rather than unhedged (-3.8%) basis. However Asia (-0.1%) outperformed the domestic and global market after easing in fears of a Chinese slowdown along with the view that Asia was insulated from Brexit concerns. Looking at the US S&P 500, some of the biggest beneficiaries were Telecoms (+9.3%) Utilities (+7.4%) and Consumer Staples (+4.8%) given the rush towards safe or defensive sectors post-brexit and lower concerns about rising US rates for bond-proxies such as Utilities. The worst performing sectors were Financials (-3.4%) and Technology (-0.8%) in the US. 4

5 Central Banks continued to weigh on sentiment. However the US Federal Reserve s hawkish rhetoric took a step back as concerns about Europe surfaced post-brexit. Pricing for the Federal Funds Futures factored in a 10% chance of a rate cut before December rather than a rate hike immediately post Brexit. The Futures have since normalised to price in a 22% chance of a hike in September, rising to 55% by December and 100% by October Australian Fixed Interest The AusBond Composite returned 1.3% for June, with the AusBond Bank Bill Index returning 0.16%. The Reserve Bank of Australia (RBA) maintained a hold on the cash rate at 1.75% in its June meeting. This saw yields rise and the Australian dollar appreciate. International events were the main drivers of financial market moves during the month as Australian bond yields rallied after Brexit and the curve flattened. Three-year bond and ten-year bonds yields fell by 11 and 32 basis points to 1.52% and 2.01%. International Fixed Interest International fixed interest performed positively, with the Barclays global aggregate up 1.98% when hedged back into Australian dollars. Global government bond yields continued to plunge as the UK s vote to leave the European Union took financial markets by surprise. This triggered a strong rally in safe-haven government debt from developed markets, driving its already-low (or negative) yields even lower. In the days following the Brexit vote, the yield on ten-year UK sovereign notes fell below 1.0% for the first time ever. The German ten-year government note s yield also decreased into uncharted terrain after the UK referendum, joining ten-year Japanese sovereign debt in negative territory. The British pound lost over 8% against the US dollar in June, while the Japanese yen gained about 8%; the euro was little changed versus the dollar. Yields on US Treasuries also decreased sharply, with the ten-year Treasury note yield finishing the month at 1.49%, its lowest level in almost four years. However, Treasury rates remained meaningfully higher than yields on other high-quality global sovereign debt, drawing more investors into the U.S. government bond market in search of yield. Having performed strongly in the previous few months, global credit markets took a backseat to Government and Treasuries, with the Barclays Global Aggregate Treasuries up 2.34% with the Global Aggregate ex-treasuries only up 1.53%, highlighting that while Treasuries were the star of the month, Investment Grade and High Yield debt still performed well. High yield corporate bonds lagged their investment-grade cousins but still posted positive returns amid significant volatility. 5

6 Crude oil prices rose above $US50 per barrel during June before declining somewhat at the end of the month, providing some support for the high yield market, where bonds from energy-related issuers account for a large proportion of benchmark indexes. Property and REITs Australian Real Estate Investment Trusts (REITs) continued to offer attractive yields and a positive return in June, off the back of ongoing expectations for low global interest rates. A- REITs outperformed the domestic share market and hedged global REITs with a return of 3.5%. UK listed real estate bore the brunt of the initial Brexit reaction, with some leading UK companies down 30% as the result became clear. In the aftermath, the three biggest UK commercial property funds (Aviva, Aberdeen and Standard Life) were forced to half redemptions and gate client money. Commodities The rally in commodities continued in June, as the Goldman Sachs Commodity Index (GSCI) Commodity Index hedged into Australian dollars rose 0.18% while Advance s proprietary commodities benchmark rose 3.3%. In June, energy prices increased by 5.1% and the prices of non-energy commodities rose by 2.1%. Agricultural and Food commodities picked up by 4.1%. Precious Metals rose by 1.2% on the back of a flight to safety late in the month post-brexit. Metals and minerals rose 0.3% as raw materials as a whole went down by 0.7%. People's Choice Credit Union, a trading name of Australian Central Credit Union Ltd ABN , AFSL This Market Watch is reproduced from information supplied by Advance Asset Management Limited (Advance) ABN , Australian Financial Services Licence No. (AFSL) This document is not advice. It provides general information only and does not take into account your individual objectives, financial or needs. You should assess whether the information is appropriate for you and consider talking with your Financial Planner before making an investment decision. Past performance is no indication of future performance. Information in this publication, which is taken from sources other than People s Choice Credit Union or Advance, is believed to be accurate. However, subject to any contrary provision in any applicable law, neither People s Choice Credit Union nor Advance (including their related parties, employees or directors) provides any warranty of accuracy or reliability in relation to such information or accepts any liability to any person who relies on it. 6