Economic & Market Update – November 18
Monthly Overview
The S&P/ASX200 Accumulation Index delivered a return of 1.93% in October. In a reversal of recent trends, the ASX performed strongly when compared to the International equities return of -1.13% as measured by the MSCI world index in Australian dollar terms and the S&P500’s return of -2.7%.
October reaffirmed that the volatility and uncertainty facing investors in 2020 is not over. October saw economic data improving hopes that a deep recession will be avoided, sending stocks higher initially. A resurgence of COVID-19 infections in Europe and the U.S. led to fears that economies would be forced back into lockdowns which sent stocks lower towards the end of the month.
The issue of Brexit re-emerged with the European Council meeting on 15-16 October passing without a deal being struck. After negotiations were briefly paused, talks are now intensifying as both sides seek to agree on a trade deal before the year-end.
In the U.S. while the virus has remained prevalent, the news flow was focused primarily on the Presidential election. Markets responded positively to polls indicating an increased likelihood of a Democratic sweep of the House, Senate, and the presidency against a backdrop of continued gridlock in Washington on a new fiscal package.
Domestically, key drivers included the supportive Federal Budget released in early October, the RBA’s commencement of monetary easing, and an improving COVID-19 outlook for Victoria. The Technology (+9.0%), Financials (+6.3%) and Consumer Staples (+4.8%) sectors outperformed the most, while Industrials (-3.9%), Utilities (-1.5%) and Materials (-1.2%) underperformed.
Market & Economic Commentary
Within the COVID-19 environment, businesses capable of adapting quickly to an online milieu have thrived, whereas many caught up in sectors such as bricks and mortar retailing, international travel, live entertainment, and so on, have struggled. All these changes have meant big winners and losers in financial markets.
Australian households received the Federal Budget with enthusiasm, despite the promise of rising debt and deficits: consumer sentiment surging 11.9% in October. Employment dropped back a little less than expected in September, with the unemployment rate edging down to 6.9%. Despite this, the big news in October was the speech by RBA Governor Phil Lowe in which he signaled a further policy easing in early November. As expected, the cash rate and 3-year bond yield target were cut from 0.25% to 0.1%. The RBA will also start buying up both 3-year and longer-term government bonds.
Governor Lowe said that the RBA wants “to see a return to labour market conditions that are consistent with inflation being sustainably within the 2% to 3% target range.” We interpret this to mean that the RBA will not be increasing the cash rate until actual inflation is sustainably within that range.
What next?
The cash rate is not expected to be increased for at least the next two to three years, making assets such as shares and real property comparatively more attractive. Australia is a mid-sized open economy in an interconnected world. This means that what happens overseas has a substantial impact on both our exchange rate and our yield curve. In the past, the interest rate differentials provided a reasonable gauge of the relative stance of monetary policy across countries, this is no longer the case. Further QE and yield curve management are expected. Given the RBA’s outlook, it will continue to be tolerant of some rise in inflation and will be led by the global monetary policy context.
[1] Data and market & economic commentary provided by Adrian Ezquerro, Head of Investments, Clime Investment Management Limited.
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Economic & Market Update – November 18
Monthly Overview
The S&P/ASX200 Accumulation Index delivered a return of 1.93% in October. In a reversal of recent trends, the ASX performed strongly when compared to the International equities return of -1.13% as measured by the MSCI world index in Australian dollar terms and the S&P500’s return of -2.7%.
October reaffirmed that the volatility and uncertainty facing investors in 2020 is not over. October saw economic data improving hopes that a deep recession will be avoided, sending stocks higher initially. A resurgence of COVID-19 infections in Europe and the U.S. led to fears that economies would be forced back into lockdowns which sent stocks lower towards the end of the month.
The issue of Brexit re-emerged with the European Council meeting on 15-16 October passing without a deal being struck. After negotiations were briefly paused, talks are now intensifying as both sides seek to agree on a trade deal before the year-end.
In the U.S. while the virus has remained prevalent, the news flow was focused primarily on the Presidential election. Markets responded positively to polls indicating an increased likelihood of a Democratic sweep of the House, Senate, and the presidency against a backdrop of continued gridlock in Washington on a new fiscal package.
Domestically, key drivers included the supportive Federal Budget released in early October, the RBA’s commencement of monetary easing, and an improving COVID-19 outlook for Victoria. The Technology (+9.0%), Financials (+6.3%) and Consumer Staples (+4.8%) sectors outperformed the most, while Industrials (-3.9%), Utilities (-1.5%) and Materials (-1.2%) underperformed.
Market & Economic Commentary
Within the COVID-19 environment, businesses capable of adapting quickly to an online milieu have thrived, whereas many caught up in sectors such as bricks and mortar retailing, international travel, live entertainment, and so on, have struggled. All these changes have meant big winners and losers in financial markets.
Australian households received the Federal Budget with enthusiasm, despite the promise of rising debt and deficits: consumer sentiment surging 11.9% in October. Employment dropped back a little less than expected in September, with the unemployment rate edging down to 6.9%. Despite this, the big news in October was the speech by RBA Governor Phil Lowe in which he signaled a further policy easing in early November. As expected, the cash rate and 3-year bond yield target were cut from 0.25% to 0.1%. The RBA will also start buying up both 3-year and longer-term government bonds.
Governor Lowe said that the RBA wants “to see a return to labour market conditions that are consistent with inflation being sustainably within the 2% to 3% target range.” We interpret this to mean that the RBA will not be increasing the cash rate until actual inflation is sustainably within that range.
What next?
The cash rate is not expected to be increased for at least the next two to three years, making assets such as shares and real property comparatively more attractive. Australia is a mid-sized open economy in an interconnected world. This means that what happens overseas has a substantial impact on both our exchange rate and our yield curve. In the past, the interest rate differentials provided a reasonable gauge of the relative stance of monetary policy across countries, this is no longer the case. Further QE and yield curve management are expected. Given the RBA’s outlook, it will continue to be tolerant of some rise in inflation and will be led by the global monetary policy context.
[1] Data and market & economic commentary provided by Adrian Ezquerro, Head of Investments, Clime Investment Management Limited.
More from this Edition
| · Note From Annick | · Investment Service Transition
· Kaplan Professional new Ontrak platform |
· Key Dates in Xplan |