April, 2022
Volatility has been all too common in global currency markets throughout April. The US Dollar Index (DXY) has seen significant increases in value, reaching levels last seen in 2016. Meanwhile, the Japanese Yen has experienced significant declines as the central bank continues its bond-buying program, at odds with the rest of the central banking cohort. This effort is intended to help finance the government's stimulus package, which includes subsidies for rising gasoline prices and support for small businesses. China has continued to adhere to its Zero COVID policy, shutting down a significant portion of its economy. This measure has dampened Chinese growth expectations, despite stimulus plans being implemented. Furthermore, with the Chinese economy mostly locked down, supply-chain disruptions could exacerbate already high inflationary pressures. However, if growth slows down, it could relieve some of the pressure on commodities that have been experiencing high prices.
Australian bond yields rose in unison with their global counterparts, alongside rising inflation expectations and a chorus of hawkish central bank rhetoric. Risk appetite took a hit as markets began to price in consecutive rate rises from the US Federal Reserve, with credit and equity markets all softer in the month of April. The Reserve Bank of Australia got the data it needed for a May hike in interest rates, with the last three core CPI readings coming in hotter than expected, with the most significant price rises in New dwelling purchases by owner-occupiers +5.7% and Automotive fuel +11.0%. The March quarterly CPI print came in much hotter than expected at +2.1% for the quarter and +1.4% in the trimmed mean reading.
File:March, 2022
The first quarter of 2022 has drawn to a close, and US stock markets have delivered the first quarterly loss in over two years due to a range of factors like the ongoing geopolitical situation in Ukraine, surging global inflation and a hawkish change from the US Federal Reserve. Inflation had already reached 40-year highs in Q4 last year, with a +6.8% CPI reading in November 2021 and a +7.9% CPI reading in February 2022. The US Fed's George (FOMC voter and hawk) recently stated that it's appropriate to raise rates to the neutral level expeditiously. Balance sheet size needs to decline significantly if inflation is still high at the neutral funds rate; more hikes will be needed. Puts neutral rate at around 2.5% 'as a starting point'.
The ASX 200 has ended Q1 2022 with a +2.61% gain and was a relative outperformer of the US and global equity counterparts due mainly to the surging prices seen in the commodity space, buoyant Financial and Technology sectors. In Q1, Iron Ore has gained +40%, Nickel +55% and Natural Gas +61%, all pushing local producers skyward. For the month of March, the ASX 200 gained +6.35% on a total return basis to end just shy of the 7500 level, outperforming the S&P 500 by +2.77% on the month.
Commodity prices and interest rates have risen in unison over the past months, while the world's economies are adjusting to the supply chain issues and changes in consumer spending impacted by COVID. The Russian invasion of Ukraine was the fuel to the fire, pushing commodity prices even higher as harsh sanctions were imposed. Interestingly enough, the major US equity indices bounced a day after the initial invasion of Ukraine and have been trading higher since.
File:February, 2022
The month of February 2022 was an incredibly wild ride in markets, with 2-3% daily swings in major equity indices a regular occurrence. The month of February started positively, following on from the late January rally in equity markets. Investors remained sceptical of a supposed 50bps interest rate hike from the US Fed in March, which saw yields back off the highs and risk appetite pick up slightly. The rally quickly faded after the January inflation data came in at the highest rate since 1982 and called for a more aggressive path for interest rate hikes returned.
No sooner than the market was coming to terms with a March interest rate hike in the US, the focus quickly shifted to the geopolitical headlines regarding Russia and Ukraine, which has since turned into the precursor for the Russian invasion. Risk assets dived on this news, and safe-haven flows were in demand. Fighting intensified in the closing days of the month, as did the sanctions imposed by Western countries, which now include removing some Russian banks from the SWIFT payment network and freezing Russian assets around the globe.
The ASX 200 finished the month of February in the green, finishing up +2.11% with most other global equity markets in the red. This was after the index's worst monthly performance in January since 2008. The RBA did not change the current monetary policy settings at the March meeting, noting that the economy had a positive feeling, even as the risks increased from the previous meeting. The RBA noted the upside risks to inflation coming across as more hawkish in their overall assessment. The January unemployment rate in Australia held steady at 4.2%, while the participation rate (66.2%) and the number of people employed grew slightly.
File:January, 2022
Equity markets surrendered in January to the pressures of soaring inflation, a monetary policy shift for the Fed, the Omicron variant, geopolitical tensions with Russia and Ukraine and the persisting supply chain issues drove the risk-off sentiment. The ASX 200 fell by -6.5%, the S&P 500 -by 5.26%, Dow Jones Industrial Average -by 3.32%. The high-beta indices saw the worst of it, with the Nasdaq 100 -8.93% and the Russell 2000 -9.66%.
The unemployment rate in Australia dropped to 4.2%, with 64,800 new jobs added in December, beating market expectations. Following the global trend, the quarterly inflation figures in Australia also came in slightly hotter than expected at 1.3% (1.0% Trimmed Mean CPI), bringing the annualised rate to 3.5% for the calendar year and above the RBA medium-term target range of 2-3%. This may bring about speculation that the RBA will have to move sooner than the 2024 lift-off date previously mentioned.
The change in monetary policy stance from the US Federal Reserve was the most notable event in the month. The major US equity markets dropped following the release of the December FOMC meeting minutes on Jan 5. The hawkish shift was attributed to a robust economy, a tightening labour market and persistently high inflation. Futures markets are now pricing in a March increase in the federal funds rate and faster subsequent increases than previously expected. The Nasdaq 100 and the Russell 200 both declined by more than -3% following the release of the FOMC minutes.
File:December, 2021
Global equity markets surged in 2021 on the back of unprecedented monetary and fiscal stimulus, strong economic activity and burgeoning corporate earnings. Not even the headwinds of soaring inflation, new COVID variants and a recent hawkish tilt by the US Federal Reserve and other central banks around the globe could dampen the exuberance in the final days of December 2021. Australian employment data provided continued to improve throughout 2021. The unemployment rate came in at 4.6% in November, with 366,100 new jobs added, well above market expectations. The employment report was a real bright spot, with 128,300 full-time jobs and the participation rate lifted back toward pre-COVID levels at 66.1%. Australia has been one of the best-performing nations regarding economic recovery but hit a speed bump in the third quarter of 2021 with renewed lockdowns caused by the Delta variant.
In 2021 on a total-return basis, the S&P 500 was the standout gaining +28.8%, the tech-heavy Nasdaq 100 +27.6%, Nasdaq Comp +22.3%, the Dow Jones Industrial +21.0%, and the small-cap Russell 2000 index lifted +15.2%. The ASX 200 posted a +15.92% gain (all quoted in local currency terms). Since the global financial crisis lows in 2009, 2021 was the second time in the last 13 years where the S&P 500 has outperformed the Nasdaq 100. Given the Nasdaq 100 outperformed the S&P 500 in 2020 by +31%, it held up relatively well.
File:November, 2021
The ASX200 posted its third consecutive monthly decline in November after a late sell-off led to a -0.5% decline on the month. Still, the ASX200 was a relative outperformer when compared to the -0.7% drop in the S&P500 and the larger losses seen in Europe (-2.3%) and emerging markets (-3.2%). In November, Australian Government bonds found a bid, with the yield falling by 38bps after rising by 59bps in October. The AU 10Y bond yield closed at 1.70% in November, off the highs seen in October of 2.07%.
US Federal Reserve Chairman Powell's comments during the month caught the market by surprise when he suggested it was time to retire the word 'transitory' regarding the inflation outlook. Seeming more concerned about having to adjust monetary policy to keep the inflationary pressures in check and that he thought it was important to complete the tapering process faster than previously expected.
Market participants had speculated that the rising Omicron COVID cases might encourage the Fed to slow down on their tapering plans, especially after highlighting this concern specifically during the month by saying that Omicron could pose downside risks to economic activity, employment and inflation. A hasty taper plan could mean that we see rate hikes sooner than previously forecast, which could be highly impactful to markets. Fed fund interest rate futures are pricing in a 28% chance of a rate hike by March 2022 and a 58% chance for May 2022.
File:October, 2021
After a brief pause in September, equity markets surged to fresh highs in October as the S&P500 posted its best performance of the year so far. Equities caught a bid on the back of solid earnings and rising risk appetite as Congress drew closer to a sold spending package. Stocks rose in unison with oil prices, with WTI crude lifting over +10% in the month, fetching near a seven-year high around $86/bbl as consumption dwarfed supply draining oil reserves. The ASX 200 slightly declined for the second month running, dipping by 0.1% in October. The ASX200 lagged last month due to an uptick in inflation and tighter monetary policy in Australia compared to other developed economies.
Earnings season started positively, but economic data began to muddy the waters as consumer prices continued higher. If prices continue to rise further, the Federal Reserve may have to cut back on its support for the economy and start to raise interest rates, even though the US economy grew only 0.5% in Q3, which is the weakest growth figure since the pandemic began. The Federal Reserve has signalled that it does not plan on raising interest rates soon, but the market now expects to taper their bond-buying program in the months ahead.
Bottlenecks in the global supply chain and the combination of rising energy prices have investors on their toes regarding the inflation outlook. The short end of the curve has begun to rise as expectations for interest rate hikes around the globe have been brought forward. Many Central Banks worldwide have become more hawkish in their views which have put upward pressure on yields. The Bank of Canada surprised the market by ending its bond-buying program abruptly and signalled rate hikes in the near future. The Bank of England is preparing to raise rates in November, and the Reserve Bank of Australia abandoned the 'yield curve control policy'.
File:September, 2021
The 3rd quarter has now drawn to a close, and investors are sighting a number of cautionary factors to consider for the remainder of the year. After a strong performance in equity markets since the beginning of 2021, investor risk appetite is beginning to show signs of slowing, with the US Fed and many other Central Banks around the world tilting towards tapering their stimulus programs and bond yields around the globe beginning to rise.
In Australia, we saw the extension of lockdown measures in both NSW and Victoria, but that had little negative effect on equity markets, as the market began to price in a delay on the RBA's tapering plans, contrary to many other Central Banks. Improved vaccination rates and a clearer picture of the reopening plans has allowed investors to look through the lockdown related contraction to a solid outlook for the economy in 2022. For the third quarter, the ASX200 posted a +1.7% gain which beat both the US and European indices, which returned +0.6% but lagged Japan which gained a standout +5.3% (all in AUD terms).
In recent weeks, natural gas prices in Asia and Europe have surged, prompting further concerns that inflationary pressures might last longer than Central Banks and market participants currently expect. As the Northern hemisphere heads towards winter, increasing energy costs are expected to impact global growth if the trend continues. The Bloomberg Commodity Index jumped +5% in September and is now up +29.2% year to date. Natural Gas surged +34% in September and +135% for the year. WTI lifted +14.2%. +56% for the year, for the highest monthly close since 2014.
In US corporate news, constant chatter about supply chain constraints dominated the airwaves in September and seemed to be deteriorating rather than showing signs of improving. This news, alongside potential technical factors relating to month-end and quarter-end, triggered a three-day sell-off in US equity markets in the final days of September. The major bourses fell around -5% from the September highs, and US Treasury yields backed up to above 1.50%. WTI crude oil approached levels not seen since 2008 and Brent crude popped above $80/bbl.
File:August, 2021
The month of August saw strong returns across the board in global equity markets, with the ASX200 gaining around +2.4%, S&P500 +2.9% and the Nikkei225 in Japan the most notable with a +3.1% rise. European equity indices and Emerging markets also lifted around +2.2%, respectively (all quoted in AUD terms).
The Aussie dollar experienced some mild volatility in August, trading down to around 0.71 vs the USD late in the month, mainly on the back of swings in the iron ore price and chatter that the RBA would postpone the tapering of its bond-buying program. Interestingly, it ended the month flat, closing around the 0.73 level after seeing strength in other commodity prices and the RBA confirming they would not change course.
Iron ore futures fell sharply in the month, giving up around -20% from the opening month highs. Ongoing concerns around the Chinese economy slowing, industrial production target cuts and seasonal factors are all to blame for the pullback in iron ore prices. Iron ore ended the month around $152 USD/tonne after trading as high as $220 USD/tonne in July.
The Australian second-quarter GDP numbers surprised to the upside, coming in at +0.7% (Q/Q) as growth continued to be supported by domestic spending and government fiscal policies. The restrictions in place in NSW only impacted the last few weeks of the quarter and will have more of an impact in Q3, with a large contraction expected.
File:July, 2021
July saw a month-long rally in US equities run into some headwinds in the final week of the month. The Chinese regulatory crackdown on US listed companies began to create some trepidation for investors on those stocks and a heavy IPO issuance persevered. Robinhood's remarkable reception suggested that investors still have an appetite for the plethora of equity supply, with the stock trading up to $85/share after trading around $33/share just days earlier.
In Australia, the ASX200 gained +1.2% in July and is up over +14.2% since the beginning of 2021. The ASX200 underperformed indices in the US (+2.5%) and Europe (+1.6%) in July but outperformed Emerging Market (EM) indices which lost ground (-6%) in the month. The losses in EM can be largely attributed to the sell-off in Chinese and Technology stocks on the main, which reverberated locally with Technology (-7.1%), Energy (-2.7%) and Financials (-1.5%) listed on the ASX200 trading lower in the month. The Materials sector gained ground in July (+7.2%), as did Industrials (+4.4%).
File:June, 2021
Stock markets in the US rounded out the first half of 2021 close to or at record highs as the economy continued to pick up the pace with more people returning to work. Monetary and fiscal stimulus remaining at historic levels provided a consistent tailwind to markets, and there's little to show either will be removed any time soon.
In Australia, the ASX200 gained +26.9% in the 12-months to June 30 2021, while the All Ords Index had its best year since 1987 in the same period. YTD, the ASX200, has gained around +11%, showing a slightly weaker second-half performance. On the final day of trading on June 30, the ASX200 index closed at 7,313 points, up slightly on the day.
The benchmark S&P500 finished the first half with a total return of above 15% after a lacklustre start in January, stringing together five straight months of gains. The Russell 2000 (+17.5%) and Russell Microcap (+28.8%) indices have outperformed broadly. The Nasdaq 100 (+13.2%) underperformed slightly in H1, after posting a record outperformance in 2020 of around +30% vs the S&P500. The Tech index came back into favour in June, as a swing back into Growth assets started to take place late in the month while the VIX index fell back to levels not seen since before the start of the pandemic.
File:May, 2021
The S&P500 and the Dow Jones climbed back to within striking distance of all-time highs as May drew to a close. US New Home Sales figures seemed to suggest that the surge in US home prices has caused some buyers to walk away from newly built homes. President Biden released the details of a $6T budget that is sure to get push back from Republicans as the infrastructure debate looks to drag into June. Positive late-season retail earnings reports and corporate commentary indicated consumer strength has returned to 2019 levels and even accelerated into the current quarter. Inflation remained the overarching topic foremost in most investors minds. The narrative didn't change, even though the Fed's preferred measure of inflation, core PCE, saw the April y/y number reach its highest level since the early 90s.
Australia's April jobs report showed the unemployment rate falling to 5.5% as the labour market continues to improve much quicker than expected. COVID flare-ups and the expiration of the JobKeeper program may see the numbers start to slow in the coming months. The ASX200 enjoyed a solid 2.3% gain in May, outperforming most other major global indices. Financials, Consumer Discretionary and Materials all lead the charge higher while IT and Utilities pulled back in the month. The Chinese Yuan broke out to its strongest level against the US Dollar in roughly 3-years.
File:April, 2021
US equities again pushed to record highs in April against the backdrop of an increasingly dovish Federal Reserve, improving economic data, strong earnings from big US corporates and the ever-improving vaccination rollout to combat the COVID-19 pandemic, with total US vaccinations breaking the 100 million mark during the month of April. Once again, the Federal Reserve conveyed its intent to keep interest rates close to zero for the foreseeable future to support the economic recovery for the COVID-19 pandemic after first slashing rates over one year ago. The US unemployment rate remained at 6.0%, despite more than 2 million fewer Americans in the labour force compared to pre-COVID levels. The Federal Reserve expects the economy to perk up in the months ahead, with some investors worried about the fast return of inflation in the economy. The ASX 200 gained 3.47% in April, though underperforming the 5.24% rise in the S&P500. The AU 10Y yield finished the month at 1.79% but experienced significant volatility during the month. Business and consumer sentiment in Australia moved back above pre-COVID levels as the economy continues to recover. The Australian housing market remained in focus, building approvals for the month up an astonishing 21.6% m/m.
File:March, 2021
Against the backdrop of heightened volatility in March, the S&P500 (+4.6%) and the Dow Jones (+6.7%) rounded out their best month since November 2020, with both benchmarks posting new highs in the final week of the month. The Nasdaq 100 (+0.5%) consolidated recent gains as growth names felt the pressure of rising interest rates. In comparison, the Russell 1000 Value Index (+5.9%) outpaced the Russell 1000 Growth Index (+1.7%) by a massive four percentage points after gaining six percentage points in February (being the most significant outperformance since March 2001). The ASX 200 (+2.4%) gained only modestly compared to the global benchmarks, mainly due to the decline in commodity prices. The rotation from Growth into Value and Large-cap into Small-cap continued in Q1 after beginning in October. Rounding out the quarter, the Russell 2000 (+12.8%), S&P 500 Mid-cap (+13.6%) and the Russell Micro-cap (+23.8%) were the best performers. Looking at the US sector level during March, the often defensive Utilities (+10.6%) and Consumer Staples (+8.3%) both bounced during the month, pushing both sectors back into the green for the year. REITs (+6.5%) had another excellent month posting their fifth consecutive month in positive territory. The cyclical sectors also remained strong, led by Financials (+5.8%), Industrials (+8.8%) and Basic Materials (+7.7%). Energy (+2.7%) consolidated recent gains after a blistering start to the year. Since the beginning of 2021, Energy (+30.7%), Financials (+15.8%) and Industrials (+11.4%) are the only sectors in double-digit territory.
File:February, 2021
Equity market volatility reappeared in the month of February alongside rising interest rates. Adding to the concerns surrounding rising rates and its potential impact on inflation, the price of crude oil surged 10% in the back half of the month to one-year highs after OPEC decided against raising production levels meaningfully. The 10-year yield in the US traded above 1.5%, and rising inflation expectations were evident when the 5-year TIPS breakeven topped 2.5% for the first time since 2008. Speculative growth stocks, in particular small caps, experienced a sharp pullback, while value stocks outperformed, led by the bounce in energy markets. In Australia, the ASX200 gained around 1.5%, notably less than the 2.7% rise in global equity indices. Earnings season was broadly robust, but even this could not offset the worries around rising interest rates late in the month. The 10-year Australian Government Bond yield ended the month of February at 1.88%, up from 0.97% at the start of 2021.
File:January, 2021
The recent FOMC meeting saw the Fed's chair, Jerome Powell say he does not see interest rates rising any time soon and that the committee would like to let inflation run above 2% for some time. He also noted the recent optimism in markets primarily due to the vaccine and fiscal stimulus as the main driver for higher asset prices, not the Fed's monetary policy. US equity markets posted gains for most of January, with the major indices hitting fresh all-time highs in the last week of the month. Still, volatility quickly returned in the final days, reportedly driven by retail investors activity in heavily shorted stocks. The ASX200 posted a modest gain in January +0.3%, with Consumer Discretionary (+4.8), Communications (+2.8%) and Financials (+2.3%) leading the way. Real Estate (-4.4%), Industrials (-3.1%) and Health Care (-1.8%) sectors all lagged during the month.
File:December, 2020
The markets ended the year on an optimistic note with US stocks posting substantial gains in the month of December and finishing the year at fresh record highs. European bourses such as Germany's DAX didn't share the same optimism, eking out a meagre 3.5% gain for the year, while France's CAC and the UK's FTSE were down double-digits for the year, handing the UK the worst performance since the 2008 GFC. A drawn-out Brexit negotiation resulted in late-stage concessions to get a deal across the line which rubbed salt in Britain's wounds. December also saw the US managing to avoid a government shutdown as President Trump reversed course and signed the budget and Covid relief bill into law on the last Sunday of the month. Prospects for boosting the aid package for US consumers quickly faded as Senate Republicans railroaded Trump's late push to raise direct payments to $2,000 per person.
File:ticker: ECONSHORT
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