Geopolitics dominates markets 

Highlights

  • US Fed cuts rates again by 0.25%
  • Shares move higher across the globe

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Political events around the world played a key role in driving market movements in October, with risk asset markets and the global growth outlook benefiting from some positive developments.

The US and China are close to signing a ‘phase one’ agreement and the market views the deal to be supportive of business confidence and activity. The impact of the trade war is being felt in US industrial activity, which continues to soften. Consumer spending and the labour market remain strong.

US Fed cuts rates again, Brexit negotiations improve growth

The US Federal Reserve lowered interest rates by 0.25% in October to support the economy and protect it from ongoing risks, particularly from trade tensions and the slowdown in global growth.

Fed officials have said that further action will be largely dependent on future economic dataflow.

In the UK and Europe, Brexit negotiations between the two regions progressed positively in October, with Europe agreeing to a deal. The outcome for Brexit now lies with the UK government following an election to be held in December this year. Growth in both regions improved marginally in October but is expected to remain soft.

Chinese indicators remain soft

Chinese economic data releases were mixed in the month as industrial production improved to 5.8% year on year grew and retail sales growing by 7.8%, but GDP growth and measures of trade activity missed expectations.

Authorities are still pursuing balanced stimulus measures that are mainly aimed at boosting infrastructure investment.

Shares move higher

In Australia, the unemployment rate improved to 5.2%, and the RBA kept rates on hold during its November meeting. The property market continues to strengthen, which should help to gradually improve consumer confidence.

Share markets moved higher in the month. Positive developments in the US-China trade war and the Brexit negotiations, coupled with strong earnings releases, bolstered growth expectations and improved risk appetite.

Japanese shares led the way given their sensitivity to global trade, increasing by 5%. US and European shares also saw strong gains, rising 2% and 1% respectively.

Fixed income underperformed, with a sell-off in yields caused by a more positive global growth outlook. This resulted in a negative return for fixed income.

We anticipate further easing in global trade tensions may lead to a gradual rise in bond yields over time. However, if growth remains weak, this is likely to anchor yields at lower levels.

Our investment performance to 31 October 2019

View our investment returns

Investment commentary

All pre-mixed options delivered a positive return in October as the increase in equity markets offset the negative return from bonds.

Australian fixed interest remains anchored to the low end as the RBA maintains an easing bias. Inflation remains below the central bank’s targets and wages are still on a gradual recovery. Terms of trade are being negatively impacted by a stronger Australian Dollar.

Global shares moved higher in the month as easing in global trade tensions and stronger than expected earnings releases supported risk appetite. Defensive companies gave up some returns as bond yields rose, while cyclicals continue to perform well, as low interest rates spur higher consumer spending and global demand expectations recover.

Australian shares underperformed against global shares despite expectations for greater global trade demand. Banks dragged on the index as earnings remain under pressure from low rates, increased competition, regulatory changes and global uncertainty. Resources companies will be impacted by lower prices due to easing on global supply concerns in iron ore and oil.

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.