Market update

Central banks continue to normalise policy settings

The more positive economic environment has encouraged central banks to ‘normalise’ monetary policy, which means gradually returning short-term interest rates—and in the Federal Reserve’s case, its securities holdings—to more ‘normal’ levels.

In the US, the Federal Reserve raised the policy rate by 0.25% to 1.5%-1.75%, and the market expects another two rate hikes this year. The European Central Bank and Bank of Japan continue to maintain accommodative monetary policy (keeping interest rates low), while acknowledging
the improving economic backdrop.

Global share markets react to US tariff announcements

The US announced tariffs on steel and aluminium imports, drawing criticism from the European Union and China, who both indicated they would retaliate in kind. Despite the tit-for-tat rhetoric
unsettling share market sentiment, an all-out trade war is unlikely because it affects all parties involved and the global economy.

Global share markets declined during the month on the back of these concerns, with most developed markets falling around 2.5%. Emerging markets fared slightly better, declining 2%. A more normal level of volatility seems to have returned to share markets in the wake of the sudden market sell-off in early February, marking an end to the period of unusually calm markets during 2017.

It was a turbulent month for the IT sector in the US, with tech giants Facebook and Amazon leading markets lower. Revelations about improper sharing of user data by Facebook sent the company’s shares down 10%, while Amazon fell 6% after questions were raised about its tax practices.

Local business conditions improving

The Reserve Bank left the cash rate unchanged at 1.5%, which should support the economy’s transition to non-mining growth. The economy is making good progress with this transition as business conditions improve and the domestic unemployment rate continues to fall.

The Australian share market fell 4.2% under the influence of both local and international developments. Allegations of questionable practices by financial institutions surfaced during the Royal Commission’s ongoing inquiry, weighing on the Financials sector. Materials stocks also came under pressure as the iron ore price declined 20% during the month due to rising trade tensions between the US and China.

The decline in share markets and more risk-averse sentiment helped fixed income markets, with global bonds rallying during the month. The yield on 10-year US Treasury bonds declined slightly to 2.73%, while the yield on 10-year Australian government bonds also fell, down to 2.60%.

The risk-averse trend was also evident in international currency markets, with investors buying the safe-haven Japanese yen, while the Australian dollar declined compared to most other currencies.

Past performance is not a reliable indicator of future performance. This information has been prepared by First State Super Investments on behalf of FSS Trustee Corporation ABN 11 118 202 672 AFSL 293340, trustee of the First State Superannuation Scheme ABN 53 226 460 365.