Strong quarter for global economy


  • Monetary policy settings gradually return to normal
  • Transition of local economy making good progress 


The global economy continued to strengthen over the first three months of the year, and growth is expected to remain above trend for 2018 and 2019. This has supported good levels of job creation and rising business investment.

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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.

Extract from Reserve Bank media release

3 April 2018

The global economy has strengthened over the past year. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. The Chinese economy continues to grow solidly, with the authorities paying increased attention to the risks in the financial sector and the sustainability of growth.

Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets. As conditions have improved in the global economy, a number of central banks have withdrawn some monetary stimulus and further steps in this direction are expected.  

Our performance

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Investment commentary

All the pre-mixed options delivered negative returns during March as global equity markets sold off due to rising trade tensions between the US and China. The Australian dollar weakened versus most other currencies, falling 1% against the US dollar and enhancing unhedged US-dollar returns in the process.

The Australian share market underperformed global peers, with the ASX 200 Index down 4.2% during March. The announcement of tariffs on steel and aluminium imports by the US led to concerns about demand for iron ore, and its price declined 20% over the month. This in turn affected Resource stocks, which fell 5.7% over the same period. Financials declined 6% as allegations of misconduct surfaced during the Royal Commission’s inquiry into the industry.

March was a tale of two halves as global equity markets rallied in the first half of the month, then sold off during the second half to finish down 2.3%. The market had priced in US tariffs on steel and aluminium imports, but sentiment deteriorated when a further USD 60 billion in tariffs on Chinese imports was announced, with China retaliating in kind. Sentiment was also weighed down by data security concerns at Facebook, resulting in a selloff in the technology sector.

Rising trade tensions between the US and China unsettled market sentiment this month. Bond markets rallied in this risk-averse environment, with 10-year US Treasury bond yields down to 2.74%, and 10-year Australian government bond yields down to 2.60%. The US Federal Reserve continued to normalise monetary policy, raising its benchmark rate by 0.25% to 1.50%-1.75%. The Reserve Bank left the cash rate unchanged at 1.5%, noting that while the domestic economy continued tomake good progress with the transition to non-mining activity, household consumption had changed only modestly and wage growth remained low.

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.