July, 2023
Equity markets continued to grind higher, with global shares rising for a seventh consecutive month in AUD terms. Inflation fell further which has resulted in expectations, both here and in the US, that rates might now have peaked. Combined with the resilient jobs market, this has shifted market sentiment away from a possible recession to a soft landing. Australia's S&P/ASX 300 index gained 2.9% and is now up 7.3% for 2023 to date.
Energy stocks were the key driver of Australia's performance in July, with a 16% rise in oil prices leading the sector higher as Russia cut exports; stronger-than-expected economic growth in the US was additionally supportive. Energy stocks gained 8.4% last month for the best performance, with financials (+4.9%) and Tech (+4.8%) also outperforming. Defensive sectors lost value, with healthcare (-1.5%) and consumer staples (-1.1%) the weakest.
The market had to digest a number of quarterly production reports from mining companies in July, a few common factors included solid production numbers, increases in capital expenditure and softening in some pricing, all of which contributed to fairly cautious guidance. Iron ore prices have held up quite well despite the slowing China economy and a property market there that has thus far failed to rebound. Lower inflation in the June quarter took some pressure off the RBA and was enough of a signal for it to leave rates on hold for another month, only the second since the hiking cycle began. Annual CPI for the June quarter came in at 6%, below forecasts and comfortably below the 7 of the prior quarter.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/fs_WST_MMF0115AU-6.pdfJune, 2023
Equity markets rose in June, continuing to defy expectations throughout 2023 as expectations of a paradigm shift in AI drove tech stocks even higher and bond yields stabilised as inflation fell from peak levels. Australia's S&P/ASX 300 Index delivered a 1% return over the June quarter including dividends, underperforming both the MSCI World (+6.8%) and the US S&P 500 (+8.8%).
Australia's lower exposure to tech stocks and greater reliance on China for its exports led to relative underperformance, and was further exacerbated by huge outperformance within the US megacaps tech stocks.
The slowing Chinese economy weighed on its sharemarket, with the Shanghai Composite falling 6.9% in AUD terms, contributing to weaker performance in Emerging Markets. Sector performance in Australia was led by Tech (+18%), Utilities (+4%) and Energy (+3.8%) while Healthcare (-3.1%), Materials (-2.7%) and Consumer Discretionary (-1.9%) were the laggards. Despite a rebound in the miners and in some commodity prices in June, this wasn't enough to make up for sharper falls earlier in the quarter. Iron ore fell 11% to USD108 over the quarter, yet rebounded 10% last month on hopes China stimulus will ignite growth, although measures such a 10bp rate cut and EV subsidies have thus far been insufficient.
Oil prices fell 6% over the quarter to USD71/bbl. Bond yields have traded in a narrow 50bps range this year, with US bond yields at 3.83%, only 4bps lower than where they started the year at 3.87%.
Consumer confidence in the US rebounded sharply, helped by signs that inflation is cooling and a willingness for people to continue spending if still employed. The spending shift from goods to services there continued with the travel industry still reaping the benefits of pent-up demand for holidays post Covid, although here the Australian consumer outlook painted a less rosy picture, with cost of living pressures and higher mortgage rates hurting the domestic retail sector. After lifting rates in May and June, the RBA kept rates on hold at 4.1% at the start of July, the second pause since this rate cycle started and possibly an acknowledgment that 13 months of hikes is helping to reign in spending and cool inflation.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/fs_WST_MMF0115AU-5.pdfApril, 2023
Equity markets shrugged off risks of a credit crunch amid further US regional bank failures, and continued to strengthen in April, with Australia's S&P/ASX 300 index closing up 1.85% including dividends. Global markets have rallied this year despite recession fears, although market breadth has been worryingly narrow in the US, with two stocks (Apple and Microsoft) now accounting for 13% of the entire US S&P 500 index. The MSCI World Index gained 2.9% in AUD terms, and has risen 12.3% year-to-date, driven by a strong rebound in Europe and 7 mega-cap Tech stocks doing the heavy lifting, and contributing over 90% of the US performance.
The only blemish on Australia's performance in April was weakness in mining stocks. BHP fell 5.8%, capping off a month to forget in the Materials, the sector falling 2.6% and the only sector to lose value in April. Iron prices came off lofty levels, falling 12% to $US106 per tonne as China demand softened and inventory levels rose at steel mills there. China's weaker-than-expected peak construction period and the intention of Chinese authorities to crack down on speculative pricing contributed to the spot iron ore price being soft. A number of quarterly production reports, including from Rio Tinto and Mineral Resources, also underwhelmed.
The price of lithium fell sharply in April, hurting Australia's many lithium plays. Losses in the broader Materials sector however were offset by gains in every other sector in the ASX 300 index, chiefly Property (+5%), Tech (+4.5%) and Industrials (+4.3%).
Healthcare and Financials also outperformed the broader index. Bond yields were fairly stable, both in Australia and in the US, and by the end of the month all eyes were on the Reserve Bank to see whether it would continue to pause its rate hikes. Despite expectations to continue pausing, they delivered a surprise 25bps rate hike, making this the 11th rate rise over the last 12 months.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/fs_WST_MMF0115AU-4.pdfFebruary, 2023
The strong start to 2023 for equities came to an end in February, with most markets other than Europe weaker in their own currencies as company results pointed to a slowdown in earnings momentum. Stronger employment numbers in the US resulted in expectations for the timing of interest rate cuts being pushed further out, and bond yields resumed their upward trajectory. Domestically, an additional 25bp rate hike from the RBA put further pressure on the consumer sector and pushed the S&P/ASX300 index (including dividends) down 2.6%. Offshore market returns were helped by a sharp 4.6% fall in the Australian dollar, which meant the MSCI World (AUD) and the US S&P 500 index (AUD) both gained 1.7%, despite falling in local currencies. European and UK shares continued to rebound strongly, with the UK's FTSE 100 index reaching an all-time high last month and European shares attracting inflows given their cheaper relative valuations.
Volatility in Asian markets persisted with Hong Kong notably weaker, dragging down emerging markets indices. Back in Australia, performance was largely a reaction to H1 2023 earnings results with a near record level of earnings misses, but also an elevated number of earnings beats, this bar-bell resulting in relatively few inline results. At a sector level, utilities (+2.3%), technology (+1.9%) and industrials (+1.1%) all outperformed while materials (-7%), financials (- 3.4%) and consumer discretionary (-1.8%) lagged the most. Banks were softer following their results and despite their numbers coming in largely as expected, with the market becoming concerned over peaking net interest margins. Higher cost pressure was a thematic across the large miners, with their ability to sustain high dividends at risk. Adding further pressure to resources was weakness across the board in commodity prices.
Oil prices fell 2% to USD83/bbl, while iron ore also fell to USD117/t after rallying more than 30% the prior three months. Lithium spot prices weakened on signs of rising battery inventory and EV price cutting in China, while copper also lost 2.8%. US 10 year bond yields jumped 42 basis points to 3.92% on stronger economic data, particularly the solid US jobs print. Australian 10 year yields rose 30 basis points to 3.85% as the RBA lift rates a further 25 basis points, a ninth consecutive rise.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/fs_WST_MMF0115AU-3.pdfDecember, 2022
Despite a pull-back in markets during December, the final quarter of 2022 was a positive one for equities as early signs of peaking inflation led to expectations that the pace of rate hikes may have also peaked. The surge in bond yields throughout 2022 also stabilised, providing support to equity markets. Australia's S&P/ASX 300 index (including dividends) gained 9.1% over the quarter, outperforming global developed markets (MSCI World +3.2%) including the US (S&P 500 +1%). Europe (Stoxx 600 +13%) had a strong finish, rebounding as the risk of a potential energy crisis heading into Winter was mitigated by a warm winter and reasonable gas storage levels.
Although 2022 proved a very tough year in emerging markets, as China's prolonged Covid lockdowns combined with weakness in the property sector weighed on Chinese and Hong Kong listed stocks, there was a glimmer of hope towards the end of the year as government officials announced some easing measures. The China re-opening looks set to be one of the more dominant themes in 2023, with the market already in 'look-through' mode as iron ore rose sharply in Q4 2022. This is of course in contrast to the rest of the world where the effect of multiple rate hikes and inverted yields curves could signal forthcoming recessions.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/fs_WST_MMF0115AU-2.pdfOctober, 2022
Although the September quarter produced positive returns in Australian dollars for many markets, including Australia and the US, the underlying sentiment remained bearish as Central Banks globally continued to raise interest rates to address inflation printing at persistently high levels. Equity market returns in local currencies were much less flattering as the US dollar continued to strengthen against most other major currencies. Australian shares gained 0.5% including dividends over the quarter, although a 6.3% fall in the month of September dampened the mood as commodity prices fell and global recession fears increased. In local currency, US and European stocks both lost 5% while China and Honk Kong both fell more than 20% as Covid lockdowns weighed on economic growth, and further exacerbated with a weakening Chinese Yuan against the USD.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/fs_WST_MMF0115AU-1.pdfSeptember, 2022
Although the September quarter produced positive returns in Australian dollars for many markets, including Australia and the US, the underlying sentiment remained bearish as Central Banks globally continued to raise interest rates to address inflation printing at persistently high levels. Equity market returns in local currencies were much less flattering as the US dollar continued to strengthen against most other major currencies. Australian shares gained 0.5% including dividends over the quarter, although a 6.3% fall in the month of September dampened the mood as commodity prices fell and global recession fears increased. In local currency, US and European stocks both lost 5% while China and Honk Kong both fell more than 20% as Covid lockdowns weighed on economic growth, and further exacerbated with a weakening Chinese Yuan against the USD.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/fs_WST_MMF0115AU.pdfAugust, 2022
Australian equities outperformed most other global markets in August, despite the backdrop of hawkish commentary from the US Federal Reserve dashing hopes that the pace of interest rate rises would slow down soon. A generally better-than-expected corporate earnings season, along with a large amount of dividends hitting investors accounts, led the S&P/ASX300 index (incl dividends) 1.2% higher last month. European shares fell 5.3% as energy supply issues continued to weigh on sentiment, while US shares dropped 4.2% as bond yields resumed their upward trend after falling the previous month. Australia's greater composition of energy and mining companies provided a buffer of performance relative to most other markets, with investors benefitting from exposure to rising commodity prices in addition to receiving relatively high dividend yields distributed from mining and financial stocks.
August saw most companies report H2 2022 earnings which were generally better than expected, and with investor positioning bearish into the results, this led a rotation from defensives back into domestic cyclicals. The median company beat consensus by 0.7% on H2 net profits, although cuts to FY23 earnings estimates gathered pace with Materials seeing the most aggressive cuts, while Building Materials were revised lower on further input cost pressures. Conversely, insurance stocks received large upgrades with rising rates generally supportive for the sector. US bond yields, after a retreat in July, continued their march higher as US Fed Chairman Jerome Powell delivered a short address at Jackson Hole, putting to bed any speculation that rate hikes are close to reaching their goal of lowering inflation. US 10 year yields rose 54 basis points to 3.19% while Australian 10 year yields also rose by the same margin to close at 3.60%. US 2 year yields rose 61 basis points to 3.49%, inverting the 2yr10yr part of the curve.
Concern about energy continued to weigh on European markets as it heads into Winter, and the Euro fell below parity with the $US, having depreciated by 12% this year. The Nordstream gas pipeline, which runs some 1,200 km under the Baltic Sea between Russia and Germany and provides almost half of Europe's total gas supply, was closed by Russia for maintenance in August, adding further to anxiety there. With European gas prices having more than quadrupled so far this year, many industries have been forced to shift production offshore. Energy prices undoubtedly remain the biggest cause of an increasingly likely recession in Europe, as affordability pressures hurting both households and industry.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/192180163.pdfJune, 2022
After 10 years of flat or falling interest rates in Australia, rising inflation finally gave way to rate hikes domestically, leading equities to their biggest quarterly loss since the Pandemic. The S&P/ASX 300 index, including dividends, fell 12.2% over the June quarter underperforming global markets. After a relatively strong start to the year, June was a month where crowded sectors like materials and financials bore the brunt of the sell-off as commodity prices fell and rate hikes fuelled concern over the housing market and consumer demand more broadly. With the Australian Dollar falling 8% to USD0.69, this currency benefit helped offshore markets in AUD terms with Europe (-8%), the US (-9%) and Emerging Markets (-5%) all outperforming Australian shares. One of the largest swing factors in markets currently is the outlook for China, trying to navigate out of Covid lockdowns while at the same time addressing a weak housing market. Its desire to stimulate and increase money supply has put it out of sync with most other global markets entering a tightening cycle. Appearing somewhat more immune to the rate hiking seen in most other regions, there was a rotation back into China and Hong Kong. The Shanghai Composite index was up 11% in June in $A terms, although it is still -6% year to date. On a sector level, only Energy and Utilities posted small gains over the quarter, with the defensive Healthcare and Consumer Staples also outperforming. Technology and Property stocks were the weakest sectors, with rising rates shining a spotlight on valuations. Banks were under pressure given the looming stresses in the housing market and construction industry, offsetting any benefit to net interest margins from rising rates. Weakness in Materials (-16.7%) was a large driver of broader market declines as commodities fell, finally cracking on recession fears and the outlook for weaker demand under this scenario.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/190343430.pdfMay, 2022
Equity markets had much to contend with over the March quarter: rising interest rates, the Russian invasion of Ukraine, China reentering lockdowns, slowing earnings growth and labour and commodity shortages to name just a few of the risks. Despite numerous headwinds, Australia's S&P/ASX 300 index, including dividends, gained 2.1% over the quarter to be among the top performers, alongside other commodity producers Canada (+2.2%) and Brazil (+33%). European stocks (Stoxx 600 - 11.7%) and the US (S&P 500 -7.7%) both suffered losses in AUD terms, with Europe in a tough geography and the US hampered by a large sell-off in highly priced tech stocks.
Sector performance was driven by Energy (+25%) Utilities (+12.7%) and Materials (+11.8%) while Tech (-14%), Consumer Discretionary (-11.4%) and Healthcare (-10.7%) all lagged as the rotation into cheaper cyclicals continued along with rising bond yields. Earnings season was somewhat overshadowed by the macro, and while companies beat earnings estimates in aggregate by approximately 2%, it was clear that earnings momentum is slowing with only a few sectors in clear upgrade mode, primarily commodity-related sectors Energy and Materials. Other sectors experienced overall downward earnings revisions in March, indicating that underlying earnings momentum has weakened. Supply chain and labour constraints were a consistent theme among results, with many companies intentionally building up inventories to get ahead of supply chain delays
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/189243210.pdfMay, 2022
Equity markets had much to contend with over the March quarter: rising interest rates, the Russian invasion of Ukraine, China reentering lockdowns, slowing earnings growth and labour and commodity shortages to name just a few of the risks. Despite numerous headwinds, Australia's S&P/ASX 300 index, including dividends, gained 2.1% over the quarter to be among the top performers, alongside other commodity producers Canada (+2.2%) and Brazil (+33%). European stocks (Stoxx 600 - 11.7%) and the US (S&P 500 -7.7%) both suffered losses in AUD terms, with Europe in a tough geography and the US hampered by a large sell-off in highly priced tech stocks.
Sector performance was driven by Energy (+25%) Utilities (+12.7%) and Materials (+11.8%) while Tech (-14%), Consumer Discretionary (-11.4%) and Healthcare (-10.7%) all lagged as the rotation into cheaper cyclicals continued along with rising bond yields. Earnings season was somewhat overshadowed by the macro, and while companies beat earnings estimates in aggregate by approximately 2%, it was clear that earnings momentum is slowing with only a few sectors in clear upgrade mode, primarily commodity-related sectors Energy and Materials. Other sectors experienced overall downward earnings revisions in March, indicating that underlying earnings momentum has weakened. Supply chain and labour constraints were a consistent theme among results, with many companies intentionally building up inventories to get ahead of supply chain delays.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/189243210-1.pdfFebruary, 2022
Global equity markets finally capitulated in January, as concern interest rates will need to rise at a faster pace drove the worst sell-off in shares since the beginning of the pandemic nearly two years ago. Then hangover effects of Omicron, now manifesting in staff and labour shortages, provided a further headwind, as did tensions on the Russian/Ukraine border which sent energy prices soaring. Australian shares fell 6.5%, underperforming other developed markets when comparing returns in Australian dollars. A fall of 2.7% in the Aussie dollar enhanced offshore returns, with the US and European stocks falling 2.4%, although rising commodity prices helped some emerging markets to outperform. It was a month of huge divergence between value (cheap) and growth (expensive), with global value stocks up 1.6% and global growth stocks falling 3.4% in AUD terms.
Generally, most parts of the market that ran hard in 2021 were sharply unwound in January, especially in Tech and Healthcare where some companies struggled to justify their valuations ahead of the upcoming rate cycle.
On a sector level in Australia, Energy was the clear outperformer (+7.5%) as oil and gas prices reacted to the Russian conflict, while Utilities and Materials also posted modest gains. Tech (- 17%), Healthcare (-12%) and Consumer Staples (-9.6%) were the weakest performers. Bond yields continued to rise, with Australian 10 year yields rising 23 basis points to 1.90% and US 10 year yields rising 27 basis points to 1.78%. Commodity prices ran hard, with iron ore gaining 24% to $US144/tonne, on re-stocking support ahead of Chinese NewYear. Oil prices lifted 17% to $US91/barrel, while gold weakened, with the precious metal unable to outperform in both inflationary and non-inflationary environments.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/186325863.pdfMarch, 2021
Global equity markets were generally higher in the March quarter with the reflationary trade in full swing. Yield curve steepening, inflation expectations rising, continued strength in commodities and outperformance of value over growth stocks were all dominant features, triggered by huge amounts of stimulus putting upward pressure on price expectations. Uneven progress was made on the vaccine roll-out, with the US and UK well progressed while parts of South America and Europe continue to see surges in cases which prompted further lockdowns.
Australian shares (S&P/ASX 300 Index +3%) underperformed global markets in Q1, with the MSCI World Index +4.5%, the US S&P 500 Index +5.8% and the European Euro Stoxx 600 +7.6%, all in local currency price terms. Regions most severely impacted by Covid-19 were those that rebounded the most. Asian markets underperformed, with notable weakness from China, the Shanghai Composite falling 0.9%. A weaker currency and underperformance in the more expensive consumer and tech sectors were the primary drivers.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/172365442.pdfDecember, 2020
Confidence around vaccine approval and stimulus hopes after the Biden US election victory outweighed fears over Covid second waves and led to broad market gains across the globe over the December quarter. Australian stocks finished 2020 with a 13.3% gain in the fourth quarter which was in line with global developed markets, and outperformed the US (+11.7%) and Europe (+10.5%). The strength in the Australian dollar, fuelled by rising commodity prices and weakness in the USD, was also a feature over the quarter. In USD terms the S&P/ASX 300 index was up 21.5%. Global bond yields continued on their upward trend, with US 10 year bond yields moving sharply higher from 67bps to close out the year at 91bps. Their yield continued to move higher and rose above 1% in early January. Australian bond yields rose 23 bps from 78bps to 97bps over the quarter.
The Australian dollar gained 7.4% against the USD, despite the RBA embarking on a 100bn QE program and cutting the cash rate from 25bps to 10bps. An increase in global commodity prices and a weaker USD outweighed the RBA's efforts to keep a lid on the AUD. The stronger AUD did lead to some selling in Australian companies with USD exposure. Commodities were stronger across the board, with iron ore gaining 27% over the quarter, thanks to continued Chinese demand for steel and supply disruptions helping the spot price. Oil prices also enjoyed a rebound with Brent +19% to USD51.8, and copper continued to surge higher with a 16% gain. Gold was the noticeable laggard, with gold spot price moving up 0.7% to USD1,898.
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