The latest commentary on investment markets and the performance of our investment options.
- Most share markets up… Australia an exception
- Economic sentiment generally positive
- Fed likely to raise rates ‘soon’
A good month for shares despite uncertainty over Trump’s policies
Global share and bond markets were generally stronger during May, resulting in all our pre-mixed options continuing their solid run for this financial year.
In contrast to this generally positive performance, Australian shares finished the month in negative territory. The S&P/ASX200 Index fell by 3.4%, with small cap stocks also falling, down 2.1%.
Proposed bank levy hits share prices
The Financials sector was a big drag on performance, with a 9.2% fall largely in response to a proposed bank levy announced in the Federal budget on 6 May. The levy will apply to the four major banks, plus Macquarie, and it is expected to raise $6.2 billion over four years.
This sector was also affected by ratings agency Standard and Poor’s downgrading a number of Australian financial institutions, and a 1.1% fall in consumer sentiment. Commodities also fell, with the iron ore price down 15% and crude oil falling 2%. On the plus side, Industrials were up 4.7% and Telcos were up 3.4%.
Apart from Australia, share markets in the major developed countries rose during May, mainly because of positive economic sentiment.
In the US, the S&P500 rose 1.2%, while the technology-oriented Nasdaq again performed strongly, rising 2.4% for the month and 15.2% for the year to date.
Fed ‘cautiously optimistic’
This solid performance was underpinned by the Federal Reserve’s cautious optimism about improving economic conditions, together with its announcement that it will gradually adjust its monetary policy stance and scale back the 4.5 trillion dollars in securities currently sitting on its balance sheet. The Fed beefed up its balance sheet after the financial crisis by buying Treasury bonds and other securities to inject liquidity into the market and help keep borrowing costs low.
But the US market remains hesitant about the capacity of the Trump administration to execute its political agenda, and the controversy surrounding the President’s interactions with former FBI director James Comey has created further political uncertainty. Impeachment has been mentioned, although most observers view this as improbable.
European and Asian markets also performed strongly, with the UK FTSE100 up 4.4% and Hong Kong shares finishing 4.3% higher. In the UK, the Brexit-inspired general election gamble appears to have backfired on Prime Minister Theresa May, with the government losing its majority and needing to negotiate with the Democratic Unionist Party of Northern Ireland to form a minority government.
Higher US rates likely
Australian bond yields rose early in the month following comments by the Federal Reserve that further tightening is appropriate ‘soon’. But yields began to slide later in the month and eventually finished lower with the yield on Australian 10-year bonds finishing down slightly at 2.39%.
The Reserve Bank left the local cash rate at 1.50% at its May meeting as expected, although the bank continued to highlight the need to carefully monitor developments in the labour market, house prices, and household debt. The latter two measures, in particular, could present significant risk to household financial stability, and therefore a risk to the economy overall.
Global growth picking up says RBA
The broad-based pick-up in the global economy is continuing. Labour markets have tightened further in many countries and forecasts for global growth have been revised up since last year. Above-trend growth is expected in a number of advanced economies, although uncertainties remain. In China, growth is being supported by increased spending on infrastructure and property construction, with the high level of debt continuing to present a medium-term risk. Commodity prices are generally higher than they were a year ago, providing a boost to Australia's national income. The prices of iron ore and coal, however, have declined over recent months as expected, unwinding some of the earlier increases.
Source: RBA media release