Market Watch Latest monthly commentary from the Investment Markets Research team at BT. March Review 2018 INSIDE THIS ISSUE Stock markets were blindsided on the first day of March, when US President Donald Trump announced that the US would set new tariffs on steel (25%) and aluminium (10%). While the Administration s messaging on how the tariffs would be implemented was unclear, the stock markets reaction was not. Markets immediately dropped, and struggled for the rest of the month as concerns of a trade war grew. Developments in Financial Markets 1 Developments in Financial Markets Australian Shares International Shares Fixed Interest Currencies Commodities Australian Shares In Australia, the S&P/ASX 200 Accumulation index dropped 3.8% in March. On a price-only basis, the S&P/ASX 200 index slumped 4.3% in March, its worst monthly performance since January 2016. Bright sectoral spots were few and far between, however the S&P/ASX 200 AREIT Accumulation index gained 0.1%. The S&P/ASX 200 Industrials Accumulation index lost 3.6%, while the S&P/ASX 200 Resources Accumulation index fell 4.3%. 2 Global Economic Outlook Australia United States Asia Europe Chart 1: Australian indices - March (rebased to 100) 1
International Shares All three major US indices saw steep declines over the month, with the S&P 500 off 2.5% on a total return basis. On a price basis, the Dow Jones Industrial Average was down 3.7% and the Nasdaq Composite Index fell 2.9%, in its biggest monthly drop since January 2016. Trade-war concerns flowed into other world markets. In Europe, the Stoxx 600 fell 1.9% for March, also weighed down by the wind coming out of the sails of the Eurozone economic recovery. The DAX index in Germany fell by 2.7% and the CAC 40 in France gave up 2.9%. In the UK, the FTSE 100 index retreated by 2.4%. In Asia, the Japanese Nikkei lost 2.0% for March on a total return basis, undermined by concerns about higher US interest rates and the stronger yen, as well as fears of a global trade war. In Hong Kong, the Hang Seng index lost 2.4%, while on the Chinese mainland, the Shanghai Composite Index eased 2.8%. Chart 2: Major market indices March (rebased to 100) Fixed Interest As volatility and trade war fears hit the stock market, the bond markets attracted strong inflows. US 10 -year Treasury yields eased 12 basis points (bps) to 2.74%, while 30-year yields came in by 15 bps to 2.97%. But the flattening of the yield curve saw 2-year note yields rise by 2 bps, to 2.27%. European yields eased further over the month. German 10-year yields lost 15 bps to 0.50%, while the 2-year Bund yield remained in the red, at 0.60%. The 30-year Bund eased by 14 bps to 1.16%. UK 10-year yields fell by 15bps to 1.35%, French yields fell 20 bps to 0.72%, and the Italian 10-year yield decreased by 18bps to 1.79%. In Australia, 10-year yields dropped 19bps to 2.61%, meaning that the spread between Australian and US 10- year bond yields, which turned negative in February for the first time in 18 years, eased 7 bps to 13 bps. Australian 10-year yields are now the lowest compared with US Treasuries since 1984. Currencies The US dollar weakened against the euro, yen and pound in March. The euro was up by 1.1% against the US dollar, the pound gained 1.9% and the dollar weakened by 0.4% against the Japanese currency. The Australian dollar lost 1.1% against the greenback in March. Chart 3: EUR/USD, USD/JPY and AUD/USD - March (rebased to 100) 2
Commodities Brent crude oil surged 6.8% in March, with West Texas Intermediate up 5.4%. Iron ore slumped to an 18.7% loss in March, while gold edged 0.5% higher and silver dropped 0.7%. The Bloomberg Commodity Index eased 0.8% for the month. Chart 4: Major Commodities - Year to Date (rebased to 100) Global Economic Outlook Australia The Reserve Bank of Australia again held the official cash rate steady at its board meeting in March. The cash rate in Australia has now been steady for 19 months, the longest spell of stable rates since the mid-1990s. Australian retail trade rose by 0.1% in January after falling by 0.5% in December. Annual sales growth fell over the month, from 2.5% in December to 2.1%, and has sharply decelerated from November s 2.9% annual rate. Dwelling approvals rose by 17.1% in January, in the strongest monthly increase in more than four years, while the annual value of commercial building approvals reached a record high, at $47.4 billion. Australia s record economic expansion rolled into its 27th year, with the March National Accounts showing that the Australian economy grew by 0.4% in the December quarter, for an annual rate of 2.4%. The growth rate was lower than the September quarter, which showed 0.7% growth, for an annual rate of 2.9%. Australia s economy grew by 2.3% over the 2017 calendar year. Australian employment rose for a record 17th straight month in February, with the economy adding 17,500 jobs after rising by 12,500 in January (revised from the initial figure of a rise of 16,000 jobs). Full-time jobs rose by 64,900 while part-time jobs fell by 47,400. Over the year to February, a record number of 420,700 jobs were created. However, the unemployment rate rose from 5.5% to 5.6%, as more Australians looked for work and the participation rate rose from 65.6% to 65.7%, a six-year high. Chart 5: Australian GDP Annualised last 10 years 3
United States As was widely expected, the US Federal Reserve increased the target range for the federal funds rate in March, by 0.25%, to 1.50% 1.75%, in the sixth rate increase of the current tightening cycle. The decision pushed the federal funds target rate higher than the RBA s official cash rate of 1.50% for the first time in more than 17 years. The Fed is forecasting two more rate increases in 2018. The February US jobs number was much stronger than expected, with 313,000 jobs added, well ahead of economists expectation of a gain of 200,000 jobs. The jobs gain was the most in a month since July 2016. The US unemployment rate was steady at 4.1%. Average wages rose 2.6% in the year to February, a slowdown from the 2.9% annual growth reported for January, which had so alarmed the stock market in February, because of its implications for inflation, and thus for interest rates. As it happened, the January wages figure was revised lower last month, to 2.8% annual growth in average US wages. The US economy grew at a faster pace in the final quarter of 2017 than initially thought, while consumer spending increased more than estimated. The US Commerce Department said GDP grew at an annual rate of 2.9% in the December quarter, up from the initial estimate of 2.5% and ahead of economists expectation of 2.7%, but weaker than the third quarter s growth rate of 3.2%. Similarly, growth in consumer spending, which accounts for more than two-thirds of US economic activity, was revised from the 3.8% estimate reported in February to 4.0%, which marks the fastest growth rate since the fourth quarter of 2014. The US GDP growth forecast for 2018 was lifted to 2.7%, from the previous forecast of 2.5%, while the 2019 forecast was upgraded to 2.4% from 2.1% previously. The unemployment rate is expected to fall to 3.8% in 2018. Chart 6: US Interest Rate last 5 years Asia Japan s economy grew at 0.4% in the December quarter, the Cabinet Office said, beating the initial estimate of 0.1% growth, and making an annual growth rate of 1.6%, well ahead of both the economists median estimate of 0.9%, and the preliminary reading of 0.5%. But growth slowed from the September quarter, when the economy posted a 2.4% annual growth rate. China s industrial output rose 7.2% in January-February, beating the market s forecast of 6.1%, and rising significantly from December s figure of 6.2% (the country s economic data for the first two months was combined, to make up for the effect of the Lunar New Year holiday). Fixed asset investment, which is an indicator of infrastructure investment, was also strong, up 7.9% versus an estimate of 7%. The figures were taken as a pointer to solid first-quarter economic growth. Beijing is forecasting growth of 6.5% in 2018, down from 6.9% in 2017. China s February exports surged 44.5% from a year earlier, well ahead of both analysts median forecast for a 13.6% increase and January s 11.1% gain. Imports grew by 6.3%, short of forecasts for 9.7% growth and greatly lower than the sharper-than-expected 36.9% jump in January. For the combined January-February period, China s exports rose by 24.4%. 4
Europe Eurostat (the statistical office of the EU) reported that Eurozone GDP growth was 0.6% in the December quarter, down from 0.7% in the September quarter, leading to a full-year growth rate of 2.3% in 2017, compared to 1.8% in 2016. But for a second straight month, business activity grew at a weaker-than-forecast rate, with the Eurozone composite purchasing managers index (PMI), which covers both the manufacturing and services sectors, falling to 55.3 in March, from 57.1 in February, when economists had expected a reading of 56.7. This meant that the Eurozone s private-sector economy grew at the slowest pace in 14 months in March. The French economy is leading Eurozone growth, expanding by 0.7% in the fourth quarter of 2017, more than the 0.6% initially reported by the INSEE national statistics agency said today. The estimate for French economic growth in 2017 remained unchanged at 2%. French unemployment, at 9%, is the lowest since September 2009. Germany finally had a new coalition government sworn-in during the month, though six months after its inconclusive election in September 2017, with the Social Democrats decisively backing Chancellor Angela Merkel's Conservatives. Meanwhile, a similarly indecisive election result in Italy left the country prone to a drawn -out process of negotiations before its next government can be formed. The European Central Bank kept Eurozone interest rates on hold. People s Choice Credit Union, a trading name of Australian Central Credit Union Ltd ABN 11 087 651 125 (People s Choice), act s under its own Australian Financial Serv ices Licence (AFSL 244310) and Australian Credit Licence (ACL 244310). In Western Australia, our Financial Planning services are provided through Financial Solutions Australasia Pty Ltd ABN 36 008 939 599 AFSL 244308 (Financial Solutions), a wholly owned subsidiary of People s Choice. Financial Solutions is not an authorised deposit-taking institution and its obligations do not constitute deposits or liabilities of People s Choice and are not guaranteed or supported by People s Choice. This Market Watch is produced f rom information supplied by Westpac Financial Serv ices Limited (ABN 20 000 241 127, AFSL 233716). It is an overv iew or summary only and should not be considered a comprehensive statement on any matter or relied upon as such. This inf ormation has been prepared without taking account of your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, f inancial situation and needs. Any projections or forecasts given above are predictive in character and may not eventuate. Whilst every effort has been taken to ensure that the assumptions on which the projections are based are reasonable, the assumptions may be incorrect or may not take into account known or unknown risk s and uncertainties. The results ultimately achieved may differ materially from these projections. Inf ormation in this document that has been provided by third parties has not been independently verif ied and People s Choice Credit Union and Westpac Financial Services Limited are not in any way responsible for such information. Past perf ormance is not a reliable indicator of future perf ormance. Inf ormation current as at 19 April 2018. 5