Market Watch – March 2017

Economics overview

Australia: The Reserve Bank of Australia (RBA) Board met on 7 March 2017 and as widely expected, left the official cash rate on hold at 1.5%. There has been no change in the official cash rate since August 2016.

• There was little changed in the statement with financial markets roughly pricing in a small chance of a hike or cut by the end of the year. Most forecasters including ourselves expect no change by the RBA for a prolonged period of time, well into 2018.
• The Australian Prudential Regulation Authority (APRA) announced late in the month it was “initiating additional supervisory measures to reinforce sounds residential mortgage lending practices in an environment of heightened risks”. This announcement follows the RBA’s focus on these heightened risks at its early March Board meeting and subsequent minutes and as a result new measures were widely expected by the market but the specific measures announced were not expected.
• These additional measures communicated to authorised deposit-taking institutions (ADIs) build on those announced in December 2014 with the new measures including; limit the flow of new interest-only lending to 30% of total new residential mortgage lending (currently closer to 40%), as well as placing strict internal limits on the volume of interest-only lending at loan-to-value ratios above 80% and ensure strong justification and scrutiny for those above 90%. ADIs must also ensure lending to investors is comfortably below the previously announced 10% growth limit as well as review and ensure serviceability metrics for current conditions.
• The strength in the housing market was reinforced by March month end figures from CoreLogic showing capital city home prices rose 1.4%/mth in March and up 12.9%/yr with prices rising in all eight capital cities in March. Over the year, prices rose the most in Sydney (+18.9%/yr) and Melbourne (+15.9%/yr) and fell in Darwin (-4.4%/yr) and Perth (-4.7%/yr).
• The NAB business survey for February showed a retreat in both business conditions and confidence after sharp gains in January, although both remain above average. Conditions fell from +16 to +9 due to weaker trading conditions. Business confidence fell from +10 to +7, mainly driven by falls in recreation & personal services.
• The February labour market report showed the unemployment rate rose to 5.9% from 5.7%, with a loss of 6,400 jobs in the month. This headline figures hides the large job losses in part-time (-33,500) and gains in full-time (27,100), which is opposite to the trend of the past 12 months. The labour market continues to be a weak point for the Australian economy, holding down wages and inflation.

US: On 15 March 2017, the US Federal Reserve Open Market Committee (FOMC) raised the official Fed Funds target rate to 0.75%-1.00%, a lift of 25 basis points and was widely expected by financial markets. The follows on from the Fed lifting rates at its December 2016 meeting.

• After a very slow start to its monetary policy normalisation process, with one rate hike in both 2015 and 2016, this latest hike signals a new more active phase for monetary policy.
• There was little change to the accompanying statement, highlighting continued strengthening in the labour market and moderate expansion in economic growth.
• The Fed’s own expectation for the future path of monetary policy, the “dot plot” for 2017 remained at three rate hikes in total, so two more expected this year.
• Other news flow in March centred on the expected policy decisions and legislative timetable of President Trump. Over the month, Speaker Paul Ryan pulled legislation to repeal the Affordable Care Act (“Obamacare”) from the House of Representatives when it became clear there lacked consensus among Republicans on the legislation. This has prompted President Trump and Congress to turn to tax reform as the next big legislative push.
• The US debt ceiling was automatically reset on 16 March 2017 to the current actual level of debt outstanding of $US19.9trn. This follows the US Congress “suspending” the previous debt ceiling of $US18.1trn in November 2015 to 15 March 2017. Theoretically this means the US Treasury has no legal authority to borrow more money, but in practice will employ a number of “extraordinary measures” to keep under the debt ceiling for a number of months when Congress will either have to raise the debt ceiling, abolish the debt ceiling or suspend the debt ceiling.
• Employment was stronger than expected in February, increasing by 235k (from a revised 238k in January). The unemployment rate fell to 4.7% (from 4.8%). Average hourly earnings rose to 2.8%/yr, up from 2.6%/yr. The labour force participation rate also rose, up to 63.0%, from 62.9%.
• Inflation data for February revealed an increase of 0.1%/mth and 2.7%/yr, the strongest since March 2012, largely driven by commodity prices while rent and medical expenses continue to strengthen. The Fed’s preferred measure of inflation, the Core Personal Consumption Expenditure Index, rose 0.2%/mth and 1.8%/yr.
• Retail sales growth softened, rising 0.1%/mth in February after a 0.6%/mth gain in January. Retail sales have risen 5.7%/yr. Consumer confidence, as measured by the conference board survey, rose sharply in the month, continuing its elevated levels post President Trump’s election. The consumer confidence index rose to 125.6 in March, up from 116.1 in February and the highest level since December 2000.

Europe: The European Central Bank (ECB) met on 9 March 2017 with no change to policy. The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of net asset purchases.

• March is the last month of €80bn of net asset purchases, with as of April this amount falling to €60bn per month until the end of December 2017, or beyond if necessary.
• The ECB retains its monetary policy stance to “secure a sustained convergence of inflation rates towards levels below, but close to, 2% over the medium term” and “supports the steadily firming recovery of the euro economy” with sentiment indicators suggesting the “cyclical recovery may be gaining momentum”.
• This cyclical economic improvement can be seen in the Markit Purchases Managers Index, with the Manufactures Index rising to 56.2 in March, from 55.4 in February. The Services PMI rose to 56.5, up from 55.5.
• Inflation retreated in the month, with the annual rate slipping to 1.5%/yr in March, down from 2.0%/yr in February.
• In politics the focus remained on the French Presidential elections with polling over the month indicating a tight race between Marine Le Pen and the centrist candidate Emmanuel Macron. Currently Marine Le Pen is polling at 25%, slightly down on February’s numbers with Macron on 24%. At this stage Macron is expected to win in the second round on 7 May 2017. The first round of the vote is 23 April.
• UK: The Bank of England (BoE) met on 16 March 2017 and as widely expected held policy unchanged. There was one dissent at this meeting with Kristin Forbes considering it appropriate to increase the Bank Rate by 25 basis points.
• Prime Minister Theresa May official activated Article 50 on 29 March 2017, starting the clock on the two-year timeframe to negotiate the terms of the exit and a new deal with the EU.
• As expected the UK wants to reach agreement on a comprehensive new deal with the EU27 in parallel with the terms of the exit by March 2019. The EU27 opposes this view, as detailed by EU Council President Tusk. The next steps are expected by 27 April when the EU Council will convene to determine the broad framework for the negotiations with detailed negotiations to start in June.
• NZ: The Reserve Bank of New Zealand met on 23 March 2017 and left the official cash rate on hold at 1.75%, where it has been since November 2016.
• The RBNZ highlighted the 4% fall in the trade-weighted exchange rate since February, noting it “is an encouraging move, but further depreciation is needed to achieve more balanced growth” and on balance that monetary policy will remain accommodative for a considerable period of time and given the numerous uncertainties, “policy may need to adjust accordingly.”
• Q4 16 GDP data was released, with growth of weaker than expected at 0.4%/qtr and annual growth of 2.7%/yr, down from 0.8%/qtr and 3.3%/yr respectively.
• Prime Minister Bill English confirmed plans to change the eligibility criteria and start age for NZ Superannuation, although these changes are not due till 2037.
• Canada: The Bank of Canada (BoC) met on 1 March 2017. At this meeting the policy interest rate was left on hold at 0.5%, where it has been since mid-2015. The BoC highlighted there were still significant uncertainties in the outlook and persistent economic slack in the Canadian economy.
• Q4 16 GDP data was released with the economy growing at an annualised rate of 2.6%, down from 3.8% in Q3 16.
• Japan: The Bank of Japan (BoJ) met on 16 March 2017 and left its policies intact, as was widely expected, with the Policy Balance Rate on hold at 0% and 10-year yield target at -0.10%.
• The jobless rate fell to 2.8% in February, down from 3% as the labour market continues to tighten.
• The final Q4 16 GDP data was released, indicating growth of 0.3%/qtr and 1.6%/yr, this was up from 1.1%/yr in Q3 16.
• China: The Chinese government set their economic targets during the month, with economic growth target at ”about 6.5%” in 2017, slightly lower than last year’s 6.5%-7% target. The inflation target has been set at 3%, fixed asset investment target at 9% and retail sales at 10%. There were reductions in the target of Total Social Financing credit growth to 12%, implying slower credit growth to 2016 and a tightening bias.
• The People’s Bank of China has been guiding market interest rates higher in recent months, as China’s interbank liquidity has been tightened.
• Inflation data released in March showed an easing of pressures that had built up at the start of the year. Inflation for the year to February was 0.8%/yr, down from 2.5%/yr to January, with food price inflation retreating. Producer Price Inflation strengthened again, rising to 7.8%/yr, up from 6.9%/yr and the fastest pace since September 2008.

 Australian dollar

• The Australian dollar was weaker over the month, with falls in bulk commodity prices and higher official interest rates in the US leading to the falls. The AUD ended the month down 0.4% against the USD at $US0.7628, with the AUD reaching as high as $US0.7731 and as low as $US0.7506.
• The AUD was also weaker against the GBP (-1.7%), EUR (-1.1%) and the Yen (-1.6%) while it rose against the NZD, up 2.3%.

Commodities

• Commodity prices were mixed in March, as oil prices retreated. Oil prices had been relatively steady the three months prior to March but fell this month with reports that OPEC compliance with production cuts had slipped this month and there were further signs of an increase in US inventories.
• The price of West Texas Intermediate (WTI) Crude oil finished the month at $US50.6/bbl, down 6.3%/mth, while the price of Brent Crude oil was down 5.8% to $US53.53/bbl.
• Gas prices reversed the move seen in February, with the US natural gas Henry Hub futures price up 23.3% to $US3.10/MMBtu.
• Iron ore prices retreated in the month after gaining ground since October 2016. The spot iron ore contract (Qingdao 62% Fe fines) fell by 11.9% to $US80.75/t in March but is still up 49.6% over 12 months. There are still signs higher cost Chinese producers are switching to higher grade Australian iron ore, but the general expectation is the price of iron ore will continue to soften over 2017. Coal prices also weakened over the month.
• Base metals were mixed with the London Metals Exchange (LME) Index down by 1.0%. Nickel was down 8.7% after strong gains in February. Elsewhere aluminium (+2.0%) and lead (+3.7%) gained momentum while copper (-2.3%) and zinc (-1.9%) were weaker. The spot gold price was relatively flat in March, up just 0.1% to US$1,249.35/oz.

 Australian equities

• The S&P/ASX 200 Accumulation Index rose by 3.3% during March. Returns were broad based, with Utilities (+6.3%), Health Care (+5.5%), Consumer Staples (+5.4%), Consumer Discretionary (+5.0%), Energy (+4.8%), Industrials (+4.4%), IT (+4.1%) and Financials (+3.9%) all posting strong gains. Telcos edged +0.2% higher on a total return basis, buoyed by Telstra’s interim dividend.
• Utilities were led higher by strong performances from AGL Energy, APA Group and AusNet Services. Health Care was boosted by double-digit gains from Ansell and Sirtex Medical, while sector giant CSL had another strong month. The ‘big four’ banks performed well, as investors welcomed out-of-cycle rate rises. Elsewhere in the Financials sector, Diversified Financials and Insurers both posted heathy gains. Materials endured another difficult month and suffered from heavy sell-offs in Resolute Mining, Fletcher Building and OZ Minerals.

Listed property

• The S&P ASX 200 A-REIT index increased 0.6% in March in AUD terms, led by the office REIT sub-sector which gained 2.7%. Retail A-REITs lagged, reflecting concerns that online competitors may erode spending levels in the ‘bricks and mortar’ retail format.
• The best performing A-REITs included Charter Hall Group (+4.9%) and GPT Group (+4.5%). Property management company Charter Hall Group continued its run of strong performance following a positive earnings result announcement in February. GPT Group didn’t make any material news announcements, but continued to benefit from its high quality, diversified property portfolio, with a focus on the robust Sydney and Melbourne markets.
• The worst performers included retail A-REIT Vicinity Centres (-2.1%) and diversified A-REIT Stockland (-1.7%), whose property portfolio includes a number of shopping centres. Both stocks were impacted by concerns about potential headwinds facing the retail sector.
• Listed property markets offshore declined in March. The FTSE EPRA/NAREIT Developed Index (TR) dipped by-1.4% in US dollar terms. Hong Kong was the best performing market, with a gain of 3.2%. The worst performing market, Japan, finished the month -3.4% lower.

Global developed market equities

• Global developed equity markets had a more muted performance in March after strong gains since the election of US President Trump. The failure to pass the repeal of the Affordable Care Act, with the vote being pulled from the House of Representatives led to questions within the market of the ability of President Trump to enact his ambitious legislative agenda and ability to lift the potential economic growth rate in the US.
• Global economic data, particularly in Europe continued to perform well and equity markets had little reaction to the US Federal Reserve lifting the Fed Funds rate mid-month.
• The MSCI World Index was up 0.8% in US dollar terms in the month and 1.2% in Australian dollar terms.
• The VIX Index, a market estimate of future volatility of the S&P500 Index finished the month at 12.37 and had the lowest average quarter since Q4 2006 despite the rising geopolitical risks in the US.
• In the US, the S&P500 was flat, the Dow Jones fell 0.7% while the NASDAQ rose 1.5% ending a strong run since the election of President Trump.
• On a sector basis, MSCI Information Technology (+2.5%) and MSCI Consumer Discretionary (+2.2%) were the best performers while MSCI Financials (-0.3%) lagged the market.
• Equity markets in Europe performed well as geopolitical risks eased in the month. The outcome of the Dutch elections rejected the rise of populism while Chancellor Merkel’s party had a sound result in a state election. In France, Emmanuel Macron continued to improve in the polls against Marine Le Penn. The large cap Euro Stoxx 50 Index rose +5.5%. The best performing major EU market was Spain (+9.5%). Italy (+8.4%), France (+5.4%) and Germany (+4.0%) all rose. The FTSE100 rose 0.8% with the activation of Article 50.
• Asia markets were mixed, with the Japanese Nikkei 225 down 1.1%. The other major markets performed a bit better over the month with Hong Kong (+1.6%), Singapore (+2.5%), Korea (+3.3%) and Taiwan (+0.6%) all making gains.

 Global emerging markets

• Emerging market equities continued to recover their post-election losses, with the MSCI Emerging Market Index up 2.4% in USD terms and 2.8% in AUD terms.
• An improving global economic environment and a weaker USD has helped emerging markets.
• MSCI EM Latin America (+0.4%) and MSCI EM Asia ex Japan (+3.3%) both gained 3.3% over the month. This was despite falls in the Shanghai Composite Index, down 0.6% as monetary conditions continue to tighten.
• The MSCI EM Europe, Middle East and Africa was down slightly with Russia, Poland and Hungary all weaker.

Global and Australian developed market fixed interest

• Markets in the month were driven by central bank policy changes, specifically the rise in rates in the US, and by continued concerns around whether the Trump administration will be able to deliver on its pro-growth policy agenda.
• Largely bond yields moved little over the month as a whole, but trading ranges intra-month reflected the continued volatility in markets. European elections and speculation around ECB monetary policy changes impacted European bonds and will continue to be a localised factor impacting German bund yields and peripheral markets.
• Against this backdrop, bond yields in Europe moved the most in the month with 10-year German bunds up 12 bps. As noted above for the US, 10-year yields traded in a 29 bps range but ultimately were unchanged in the month. UK 10-year gilts were 1 bp down. Japanese bond yields rose 2 bps in the month as they continue to trade notably range bound.

Australian 10 year yields (whilst trading in a 30 bps range) ultimately ended the month roughly where they opened, with the 10-year yield down 2 bps to 2.70%.

Global credit

• Global investment grade credit spreads reversed the recent tightening trend and moved marginally wider in the month reflecting the lack of conviction in the Trump administration. European political event risk remains a potential headwind (albeit recently reduced) for credit spreads. Investment grade credit continued to provide opportunity for investors with sustained robust supply in the month.
• Specifically the Bloomberg Barclays Global Aggregate Corporate Index average spread 1 bp wider to 1.20%. US credit moved 2 bps wider, with the Bloomberg Barclays US Aggregate Corporate Index average spread closing at 1.12%. In Europe, the spread on the Bloomberg Barclays European Aggregate Corporate Index was 6 bps narrower to 1.18% on the back of the comments from the ECB. US high yield credit spreads reacted notably to the stalled growth potential in the US with the spread on the Bank of America Merrill Lynch Global High Yield index (BB-B) widening by 13 bps to 3.12%.
• Australian credit spreads consistently ground tighter in the month, catching up with the global tightening of last month and largely ignoring the volatility in outright yields. Specifically the average spread on the Bloomberg Australian Corporate Index moved 6 bps tighter to 106 bps.

Market Watch – February 2017

Economics overview

Australia: The Reserve Bank of Australia (RBA) Board met on 7 February 2017 and as widely expected, left the official cash rate on hold at 1.5%. There has been no change in the official cash rate since August 2016.

• In leaving the cash rate on hold. The RBA noted “that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
• The RBA remains upbeat about the domestic economic outlook expecting GDP growth to return to 3% at the end of 2017, as released in the February edition of the Statement on Monetary Policy. The RBA did however downgrade near-term growth after the disappointing Q3 16 GDP figures.
• The RBA now expects GDP growth of 1.5% – 2.5% in June 2017 and 2.5% – 3.5% in December 2017.
• In terms of the outlook for the official cash rate, it is expected to remain on hold throughout 2017 as the RBA balancing the risks between below-target inflation and concerns around the housing market and financial stability.
• Q4 16 GDP was released 1 March with growth recorded at a stronger-than-expected 1.1%/qtr, more than offsetting the -0.5%/qtr decline recorded in Q3 16. As a result the annual growth rate rose to 2.4%/yr from a revised 1.9%/yr in Q3 16.
• The major contributors to growth in Q4 16 were: household final consumption (+0.5%pts), public investment (+0.3%pts) and net exports (+0.2%pts). Dwelling investment and commercial building investment both added 0.1%pts to growth. The largest drag on growth came from inventories (-0.2%pts).
• One major feature of the release was a rebound in the income side of the Australian economy. Real gross domestic income rising by 2.9%/qtr and is now running at 5.4%/yr. This significant increase in the income side of the economy has been driven by a surge in Australia’s terms of trade, up 9.1%/yr in Q4 16 and 15.6%/yr.
• The December quarter Current Account Deficit was the lowest since 1980, recorded at -$A3.9bn and 0.9% of GDP. Higher commodity prices, particularly iron ore and coal led to the result, with expectations high for a surplus in Q1 17.
• The NAB business survey for January showed further improvement in both business conditions and confidence. Conditions rose from +11 to +16, around pre-GFC levels, driven by a trading conditions and employment, particularly in NSW. Business confidence rose from +6 to +10, above its long-term average.
• The January labour market report showed the unemployment rate fell marginally to 5.7% from 5.8%, driven by a large increase in part-time employment of 58.3k, partially offset by a fall in full-time employment of 44.8k.
• Wages data released for Q4 16 was in-line with expectations, with growth of 0.5%/qtr and 1.9%/yr recorded, holding at a record 18-year low. Industries with the fastest wages growth at 2.4%/yr were both health care & social assistance and education and training, while the slowest was mining (+1.0%/yr).
• US: News flow in February continued to be dominated by two key themes in the US; the expected policy decisions and legislative timetable of President Trump, and the timing of the next move higher in interest rates by the US Federal Reserve.
• The market awaited most of the month for President Trump’s State of the Union address on 28 February to gain details of his plans on tax reform, particularly corporate tax rate changes and the possible introduction of a Border Adjustment Tax.
• This State of the Union speech failed to include any specific details longed for by financial markets. Instead the speech revived campaign themes; replacement of Obamacare, a tax overhaul including lower corporate taxes and cuts for the middle class, $US1 trillion infrastructure investment and a sharp increase in Defense spending.
• At the first meeting for 2017 on 2 February 2017, the US Federal Reserve Open Market Committee (FOMC) has left the official Fed Funds target rate unchanged at 0.5%-0.75% – the rate set in December 2016.
• Chair Yellen in her semi-annual testimony to Congress testified that the Federal Reserve Board expected “the evolution of the economy to warrant further gradual increases in the federal funds rate to achieve and maintain its employment and inflation objectives” and continued to note that “waiting too long to remove accommodation would be unwise” and require sharp increases in rates to catch up.
• As a result Chair Yellen noted “at upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate”.
• This testimony, as well as other comments from members of the Federal Reserve Board has shifted expectations from economists and markets to price in a higher chance of the next move higher in the Fed Funds rate to March. As at 28 February 52% chance of a hike in March was priced, compared to 31% on 31 January, as at 3 March a hike is 90% priced in.
• Employment was stronger than expected in January, increasing by 227k (from a revised 157k in December). The unemployment rate increased to 4.8% (from 4.7%). Average hourly earnings retreated from its new cycle high to 2.5%/yr, down from 2.8%/yr.
• Retail sales continued to show good growth, rising 0.4%/mth in January, following a revised 1.0%/mth gain in December. Consumer confidence, as measured by the conference board survey, continued its strength post-election bounce, rising to 114.8, higher than the pre-election reading of 100.8, and the highest since 2001.

Europe: The European Central Bank (ECB) did not meet in February 2017, with the focus in Europe on geopolitics and continued sign of improvement in the economic data.

• In politics the focus remained on the French Presidential elections with polling over the month indicating a tightening race between Marine Le Pen and the centrist candidate Emmanuel Macron. Currently Marine Le Pen is polling at 27%, leading in the first round polls, with Macron (24%) and Fillon (21%) following. At this stage Macron is expected to win in the second round on 7 May 2017.
• In economic news, the market Eurozone Composite Index rose to 56 in February, up from 54.4 in January and is now the highest level since April 2011 and points to continued upward momentum in the economy despite the political uncertainty.

UK: The Bank of England (BoE) met on 1 February 2017 and as widely expected held policy unchanged.

• The BoE also released its quarterly Inflation Report, with the Monetary Policy Committee increasing its central expectation for growth in 2017 to 2.0% and expects growth of 1.6% in 2018 and 1.7% in 2019. The improved outlook reflects additional fiscal stimulus, improved global growth, higher equity prices and more supportive credit conditions for households.
• There were reports over the month that the government will implement corporate tax cuts to mitigate the impact of Brexit, particularly if a new deal with the European Union is not reached. The UK corporate tax rate is already on the competitive side at 20%, therefore the tax rate would have to fall below 17% to increase its competitiveness future.
• Economic data released over the month showed a continued uptrend in inflation, with the annual rate for January rising to 1.8%/yr, from 1.6%/yr. Expectations remain that inflation will continue to rise, this was compounded by announcements from major utility companies of large price increases in 2017, upward of 7%.

NZ: The Reserve Bank of New Zealand met on 9 February 2017 and left the official cash rate on hold at 1.75%, where it has been since November 2016.

• The RBNZ continued to note that the New Zealand dollar is too high “a decline in the exchange rate is needed” and the “exchange rate remains higher than is sustainable for balanced growth and, together with low global inflation, continues to generate negative inflation in the tradables sector.”
• As a result it is expected that the cash rate will remain on hold at accommodative levels for a considerable period
• There was limited major economic data out over the month, net permanent immigration figures for January were recorded at 6,460, and the biggest monthly gain since records began in 1981. Over 12 months, net immigration was recorded at 71,305.

Canada: The Bank of Canada (BoC) did not meet in February, with a meeting held on 1 March 2017. At this meeting the policy interest rate was left on hold at 0.5%, where it has been since mid-2015. The BoC highlighted there were still significant uncertainties in the outlook and persistent economic slack in the Canadian economy.

• Inflation increased to 2.1%/yr in January from 1.5%/yr previously

Japan: The Bank of Japan (BoJ) did not meet in February, its next meeting will be held on 16 March 2017.

• The preliminary Q4 16 GDP data was released, indicating growth of 0.2%/qtr and 1.7%/yr, this was up from 1.1%/yr in Q3 16. Growth was led by solid exports and improved capital expenditure.

China: Economic news in China over the month focussed on continued signs of growing inflation pressures in the economy. Producer Price Inflation (PPI) was recorded at 6.9%/yr for January 2017, up from 5.5%/yr in December and from -5.3%/yr in January 2016. CPI rose to 2.5%/yr in January, up from 2.1%/yr in December.

• In early February, the People’s bank of China raised short-term repo rates and other non-benchmark interest rates. This was partly driven by higher offshore yields pressure on the RMB as well as continued credit growth in the economy.

Australian dollar

• The Australian dollar was stronger with commodity prices over the month. The AUD ended the month up 0.9% against the USD at $US0.7656, climbing steadily over the month. Gains came despite rising expectations for a interest rate hike by the US Federal Reserve in coming months.
• The AUD was also stronger against the other major currencies; up +2.6% against the GBP, +3.1% against the EUR, +0.9% vs the Yen and +2.6% against NZD. The TWI ended the month up 1.4% at 66.7.
• The AUD continues to be supported by improvements in commodity prices and general expectations that the RBA interest rate cutting cycle is at an end, with the next move in interest rates, a hike, in 2018.

Commodities

• Commodity prices were mixed over February, as oil stabilised and an improving outlook for China drove some commodities higher.
• The price of West Texas Intermediate (WTI) Crude oil finished the month at $US54.01/bbl, up 2.3%/mth, while the price of Brent Crude oil was up 1.1% to $US56.51/bbl. Both continue to trade in a relatively tight range around $US55/bbl.
• Data over the month suggests that OPEC is largely achieving their production cuts, however Saudi Arabia is once again acting as the swing producer reducing supply more than planned as other members over produce. On the other side of the Atlantic, US production is beginning to increase as higher prices draw shale producers back into the market.
• Gas prices were weaker with the expectation of more supply, with the US natural gas Henry Hub futures price down 16.3% to $US2.515/MMBtu.
• Iron ore prices continued to strengthen over February as Chinese producers attempt to boost productivity by moving to higher quality Australian/Brazilian ore, the spot iron ore contract (Qingdao 62% Fe fines) rose by 9.5% to $US91.27/t in February.
• Base metals were mixed with the London Metals Exchange (LME) Index up by 0.4%. Nickel (+10.9%) and aluminium (+4.5%) gained momentum while lead (-4.9%), copper (-1.0%), zinc (-1.9%) and tin (-4.4%) were weaker.
• Precious metals prices, increased in February. The spot gold price rose by 3.1% to US$1,248.33/oz.

 Australian equities

• The S&P/ASX 200 Accumulation Index rose by 2.3% during February, with strong gains in the first half of the month tailing off towards month end.
• Most Australian listed companies announced their operating results for the six months to 31 December 2016. These results were the dominant driver of market sentiment during the month. On the whole it was a positive earnings season, with many companies reporting reasonable revenue growth, an ongoing focus on cost control and capital management initiatives.
• Consumer Staples was the standout sector during the month, driven by a number of better-than-expected results, including from sector leaders Wesfarmers and Woolworths.
• REITs performed well, supported by a small decline in bond yields. It was also a positive month for Financials, which were underpinned by solid trading updates from the ‘big four’ banks. The large banks reported better-than-expected bad and doubtful debt, slightly stronger mortgage repricing and solid cost control.
• Health Care had another strong month, with Mayne Pharma and Sirtex posting double-digit gains. Large bio-tech company CSL also outperformed on solid revenue growth.
• Lagging the broader market were Materials, Telco and Energy. Materials were lower despite companies in the sector posting strong results and better-than-expected dividends and capital management initiatives. Telstra dragged the Telco sector lower as the company reported softer revenue trends and pressure on key segment margins.

Listed property

• The S&P ASX 200 A-REIT index increased 4.1% in February in AUD terms, against a backdrop of stabilising bond yields and well-received half year earnings results.
• The best performing A-REITs included Charter Hall Group (+11.9%) and Goodman Group (+9.1%). Property management company Charter Hall Group gained on the announcement of strong earnings numbers, driven by higher transaction and performance fees, and robust growth in both investment management revenue and property income. Goodman Group also announced better than expected earnings numbers, and provided higher earnings guidance for the 2017 financial year.
• The worst performing A-REIT was BWP Trust (-2.4%). Reasonable earnings numbers were overshadowed by lingering concerns that vacancy rates would rise at its commercial property portfolio in coming years as core tenant Bunnings departs several properties.
• Listed property markets offshore also gained ground in February. The FTSE EPRA/NAREIT Developed Index (TR) increased by 3.2% in US dollar terms. Australia was the best performing country. Japan and Continental Europe lagged but still generated positive returns during the month.

Global developed market equities

• Global developed equity markets continued to perform over February with better economic data and the expectation of tax and regulatory reform. The MSCI World Index was up 2.6% in US dollar terms in the month of February and 1.1% in Australian dollar terms.
• In the US, the S&P500 (3.7%), the Dow Jones (4.8%) and the NASDAQ (+3.8%) were all stronger, with all three making new all-time highs and the Dow Jones crossing 21,000 just after month end following Trump’s speech.
• On a sector basis, MSCI Health Care (+5.6%), Information Technology (+4.5%) and Consumer Staples (+4.2%) were the best performers. MSCI Energy (-2.6%), Materials (-0.9%) and Telecommunications (-0.0%) lagged behind.
• Equity markets in Europe also moved higher with the stronger economic outlook, despite rising political risks. The large cap Euro Stoxx 50 Index rose +2.8%. The best performing major EU market was the Netherlands (+3.9%), while Germany (+2.6%), Spain (+2.6%), France (+2.3%) and Italy (+1.7%), and rose. The UK FT100 was also stronger up +2.3% in February.
• Asia markets eked out smaller gains, with the Japanese Nikkei 225 up +0.4% as the Yen depreciated 0.2% against the USD. The other major markets performed a bit better over the month with Hong Kong (+1.6%), Singapore (+1.6%), Korea (+1.2%) and Taiwan (+3.2%) all making gains.

Global emerging markets

• Emerging market equities continued to recover their post-election losses, with the MSCI Emerging Market Index up 3.0% in USD terms and 1.5% in AUD terms.
• Stability in the USD and yields along with softer rhetoric around US trade policy and a better global growth outlook supported emerging markets.
• MSCI EM Latin America and MSCI EM Asia ex Japan both gained 3.3% over the month. The Shanghai Composite Index was also stronger, up 2.6%.
• The MSCI EM Europe, Middle East and Africa (+0.1%) underperformed the broader index, dragged down by weakness in Russia (-8.2%) and Hungary (-1.3%).

Global and Australian developed market fixed interest

• Most of the recent excitement in markets came immediately after month end with President Trump’s highly anticipated address to Congress and comments from the US Federal Reserve Open Market Committee (FOMC) impacting markets on 1 March.
• The previous “risk-on” sentiment was reversed over the month as markets remain cautious to the potential for further drastic immigration and trade reform. Overall this resulted in 10-year government bond yields falling modestly through the month. Falls in Europe and the UK were the largest as political unrest and uncertainty continue to weigh on sentiment.
• Bond yields in the UK and Europe moved the most in the month with 10-year gilts down 27 bps and German bunds down 23 bps. In the US, 10-year yields fell 6 bps and Japanese bonds fell 3 bps
• Australian yields were range bound in the month and closed out not far from where they opened the month, with the 10-year yield up 1 bp to 2.72%. Short-dated yields fell more resulting in a flattening of the curve. Rates at the long end were likely impacted by the large Australian Government Bond issuance distracting markets from falling further with the US.

Global credit

• Credit spreads continue to be largely resilient to the Trump factor though we note that the majority of headlines have not been economic in nature. The anticipated announcement of his tax policies (when the details are finally released) have potential to move credit spreads especially if the nature or timing around tax changes disappoint. European political event risk remains a potential headwind for credit spreads however credit is again proving resilient so far. Following significant issuance in January, investment grade credit continued to provide opportunity for investors with sustained robust supply in the month.
• Specifically the Bloomberg Barclays Global Aggregate Corporate Index average spread moved 4 bps narrower to 1.19%. US credit moved 6 bps narrower, with the Bloomberg Barclays US Aggregate Corporate Index average spread down to 1.10%. In Europe, the spread on the Bloomberg Barclays European Aggregate Corporate Index was 4 bps wider to 1.24%.
• US high yield credit spreads continued to narrow in the month but in a much tighter range. The spread on the Bank of America Merrill Lynch Global High Yield index (BB-B) narrowed by 19 bps to 2.99%. The high yield market continues to be impacted by downgrades particularly in the energy and mining sectors.
• Australian credit spreads moved tighter in the month with the average spread on the Bloomberg Australian Corporate Index 7 bps tighter to 117. Supply continues to be limited in contrast to demand but Australian credit largely remains buoyed by a supportive technical environment.

Market Watch – January 2017

Economics overview

Australia: As per usual, the Reserve Bank of Australia (RBA) Board did not meet in January 2017. The next meeting will be on 7 February 2017, we currently expect the RBA maintain interest rates at 1.5% for the duration of 2017.

• The big data point for January was the release of Q4 16 Consumer Price Inflation (CPI) which came in below consensus estimates. Headline CPI rose 0.5%/qtr and 1.5%/yr, from 1.3%/yr in Q3. Key drivers included increases in Tobacco (+7.4%/qtr) and automotive fuel (+6.7%/qtr), this was partly offset by falls in furnishings, household equipment and services (-0.8%/qtr) and communication (-0.8%/qtr). Price falls for clothing and accessories (-0.8%/qtr) and household equipment are likely related to the heavy discounting over the fourth quarter and the early start to Christmas sales.
• Underlying inflation, the RBA’s preferred measure, rose to 0.4%/qtr, while the annualised rate rose slightly to 1.5%/yr from 1.3%/yr. Both measures of inflation are still below the RBA’s 2-3% target band, however they are also in line with the RBA’s own forecasts of inflation so are unlikely to lead to any change in policy or outlook.
• The December labour market report showed the unemployment rate up marginally at 5.8 %, from 5.7%, but with total employment up 13.5k (+9.3k full-time, +4.2k part-time). The increase in the unemployment rate was driven by a 0.1% pickup in the participation rate to 64.7%.
• The NAB business survey for December showed a recovery in business conditions which had weakened during 2016. Conditions rose from +6 to +11, driven by a pick-up in trading and profitability, likely related to the December holiday period, the recovery in conditions, if sustained, suggests a stronger outlook for economic growth going forward. Business confidence was stable at +6, in line with the long term average.
• The December terms of trade data showed an all-time record surplus of $AU3.5bn, significantly above the $AU2bn expected and a strong increase from Novembers revised $AU2bn. The increase was led by a 5% increase in exports, driven largely by increasing prices for coal and iron ore over the month.

US: The biggest event for global financial markets in January – and potentially the biggest event for the year, was the inauguration of Donald Trump as the 45th President of the United States on 20 January.

• Trump’s inauguration speech repeated much of the tone and content of his campaign and sent a clear message that from now it would be “America First” and a call to “buy American [and] hire American”. While financial markets continued to react largely positively to President Trump for most of the month his protectionist and anti-immigration rhetoric and policies began to weigh on markets towards month end.
• The next major political event will be President Trump’s speech to a joint sitting of congress scheduled for 28 February, which is traditionally used by new Presidents to lay out policy priorities for the years ahead. We expect further details of Trump’s legislative agenda from this speech.
• At the first meeting for 2017, the US Federal Reserve Open Market Committee (FOMC) has left the official Fed Funds target rate unchanged at 0.5%-0.75% – the rate set in December 2016. This decision was widely expected by the market (and us) – and is consistent with the Fed waiting to see the size and shape of any potential fiscal policy easing from President Trump and more data on the economy before considering further monetary policy action.
• In detailing the policy decision, the Fed statement was a little more upbeat on the economy, but not hawkish enough to convince the markets (or us) that a rate hike at the next FOMC meeting in mid-March was likely. The commentary is consistent with a slightly better outlook for the US economy in 2017 and consistent with the Fed achieving its dual-mandate of full-employment and price stability. As a result the Fed continues to signal that further “gradual increases in the federal funds rate” should be expected this year.
• Q4 2016 GDP released during the month showed growth a little weaker than expected at +1.9%/qtr seasonally adjusted and annualised (saar), comparted to expectations of +2.2%/qtr saar. Annual growth for 2016 came in at 1.9%/yr, up from 1.7%/yr in Q3 16.
• The weaker than expected growth number was driven by a downside surprise in trade which contributed -1.7%, this was partly offset by a stronger than expected inventory build (+1%). Domestic final sales were also slightly weaker than expected increasing 2.5%/qtr saar while on the positive side real equipment investment increased 3.1%/qtr saar, the first increase in over a year, likely driven by the increase in energy investment.
• Employment was a little weaker than expected in December, increasing by 156k (from a revised 204k in December). The unemployment rate increased to 4.7% (from 4.6%). However, average hourly earnings increased +0.4%/mth, taking the annual rate up to 2.9%/yr a new cycle high.
• Inflation continued to increase at a moderate pace with headline CPI up 0.3%/mth in December and the annual rate increasing to 2.1%/yr (from 1.7%). The core CPI increased by 0.2%/mth, with the annual rate up to 2.2%/yr.
• The Fed’s preferred measure of underlying inflation, the core Personal Consumption Expenditure (PCE), edged up to 1.7%/yr in December, from 1.6% previously.
• Retail sales recovered from November’s soft reading, up 0.6%/mth, after a gain of just 0.1%/mth in November. Consumer confidence, as measured by the conference board survey, consolidated its post-election bounce, falling just 1.5 to 111.8 for January, significantly above the October reading of 100.8.

Europe: The European Central Bank (ECB) meet on 19 January 2017 and left monetary policy unchanged, the next meeting is scheduled for 9 march 2017.

• EU growth remained robust in Q4 16, coming in at +0.5%/qtr, with the annual rate increasing to 1.8%/yr, well above estimated potential growth of 1%/yr. At the country level Spain continues to lead the bloc, growing at 2.8%/qtr saar, while French growth has improved to 1.7%/qtr saar and German growth is expected at 2%/qtr saar.
• The EU unemployment rate continues to decline falling to 9.6% in December, from 9.7%, the lowest rate since mid-2009.
• The first estimate of January Eurozone CPI showed inflation increased to 1.8%/yr from 1.1%/yr previously. The increase was largely driven by a jump in energy prices which were up 2.5%/mth.
• In politics the focus is turning to the French Presidential elections with the Socialist Party nominating Benoit Hamon as their candidate over the month. Current polling suggests Marine Le Pen is likely the make it through the first round (23 April 2017) and face either The Republican candidate Francois Fillon or centrist candidate Emmanuel Macron in the second round run-off (7 May 2017).

UK: The Bank of England (BoE) did not meet over January, the next meeting will be 2 February 2017.

• The annual rate of inflation rose to 1.6%/yr in December (from 1.2%), with the core CPI up 1.6%/yr in November (from 1.4%). Inflation continues to be driven by the weaker Pound and higher energy prices but the larger than expected increase in December was also related to high seasonal volatility in airfares.
• Q4 16 GDP came in at 0.6%/qtr, keeping the annual rate at 2.2%/yr, in-line with the BoE’s revised forecasts and significantly above pre-Brexit expectations.
• Services remain the driver of growth with manufacturing and construction both declining over the quarter. The best performing sectors were the distribution, hotels and restaurants sector and transport, storage and communication sector. This is consistent with the strong pick-up in consumer spending and tourism following the referendum and has likely been aided by the weaker pound.
• Over the month Prime Minister Theresa May offered more insight into what the eventual exit will look like. At her highly anticipated 17 January speech she confirmed that the UK will take back control of immigration and will leave the single market but is hopeful that a free trade agreement can be reached with the EU. She was also adamant that the UK will no longer be beholden to the decisions of the European Court of Justice and pledged to give both houses of Parliament a vote on the final deal.

NZ: NZ Prime Minister Bill English called elections for 23 September following the shock resignation of PM Key last month.

• Q4 16 CPI out in January was stronger than the 0.3%/qtr expected at 0.4%/qtr, the annual rate increased to 1.3%/yr. Inflation is now back within the RBNZ’s 1-3% target band for the first time since Q3 14.
• Core measures were also stronger with the trimmed 10% mean increasing to 1.7%/yr from 0.8%/yr and weighted median increasing to 2.0%/yr from 1.7%/yr which should give the RBNZ more comfort that underlying inflation is lifting.

Canada: As widely expected, the Bank of Canada (BoC) held official interest rates steady at 0.5% in early January.

• Inflation increased to 1.5%/yr in December from 1.2%/yr previously
• The unemployment rate increased marginally to 6.9% in December (from 6.8% previously).

Japan: The Bank of Japan (BoJ) held the cash rate steady at -0.1% in January and the 10yr JGB target rate at 0.0%.

• The annual rate of headline inflation fell to 0.3%/yr in December (from 0.4%/yr), with the core pace of inflation also down marginally to 0.0%/yr from 0.1%/yr previously.

China: Activity data in China showed a pick-up in growth in Q4 16, GDP increased to 6.8%/yr from 6.7% previously, well within the 6.5%-7% target for 2016. The growth target for 2017 has been announced at 6.5%/yr.

• Other economic data over the month showed further stabilisation in the economy. Industrial Production decreased to 6.0%/yr (from 6.2%/yr in previously), Retail Sales were up +10.9%/yr (from 10.8%/yr) and Fixed Asset investment fell +8.1%/yr (from 8.3%/yr).
• Inflation remained moderate in December, decreasing to 2.1%/yr from 2.3%/yr. China’s PPI increased by a very solid 5.5%/yr in December, well up from 3.3%/yr in November and the highest level since September 2011.

 Australian dollar

• The Australian dollar was stronger with commodity prices over the month. The AUD ended the month up 5.02% against the USD at $US0.7570.
• The AUD was also stronger against the other major currencies; up +3.1% against the GBP, +2.6% against the EUR and +1.6% vs the Yen but down -0.72% against NZD. The TWI ended the month up 3.0% at 65.8.
• The AUD continues to be supported by improvements in commodity prices and general expectations that the RBA interest rate cutting cycle is at an end.

Commodities

• Most commodity prices remained well supported in January, as the OPEC supply cuts began to take affect and the market continues to price in expectations of rising infrastructure spending.
• The price of West Texas Intermediate (WTI) Crude oil finished the month at $US52.81/bbl, down 1.7%/mth, while the price of Brent Crude oil was down 3.3% to $US55.58/bbl. Both traded in relatively tight $3-$4 ranges over the month.
• Gas prices were weaker with the expectation of more supply, with the US natural gas Henry Hub futures price down 18.4% to $US3.0/MMBtu.
• Iron ore prices were stronger (again) over January, the spot iron ore contract (Qingdao 62% Fe fines) rose by 5.7% to $US83.34/t in January.
• Base metals rose with the London Metals Exchange (LME) Index up by 7.4%. Lead (+17.6%), copper (+8.2%), zinc (+11.8%) and aluminium (+7.4%) all gained momentum while tin (-6.2%) and nickel (-0.6%) were weaker.
• Precious metals prices, which are generally more sensitive to changes in US interest rate policy and the USD, increased in January. The spot gold price rose by 5.0% to US$1,210.64/oz.

 Australian equities

• The S&P/ASX 200 Accumulation Index finished January 0.8% lower, following two months of steady gains. Weakness in Real Estate (-4.8%) and Consumer Discretionary (-4.3%) were the main drags on market performance.
• Real Estate gave back some of December’s outperformance in the lead up to going ex-dividend. Consumer Discretionary fell as a number of retail stocks, including Myer (-12.3%), reversed last month’s seasonal gains.
• The Industrials sector (-4.7%) was led lower by global pallet company Brambles (-16.1%), which fell sharply after posting a significant guidance downgrade.
• Energy (+0.5%) edged higher, as a number of companies in the sector posted their quarterly production and revenue results, which were broadly in line with expectations.
• Materials (+4.7%) had another strong month, led higher primarily by strength in commodity producers such as BlueScope Steel and Fortescue Metals. Most precious and industrial metals finished the month higher, while iron ore reached two-year highs.
• Health Care (+4.8%) had a better month, led higher by sector giant CSL. The company posted double-digit gains after issuing a surprise FY2017 profit upgrade. Elsewhere in the sector, Sirtex Medical stemmed losses after losing almost half of its value during December.

Listed property

• The S&P ASX 200 A-REIT index gave back some of December’s gains, declining by -4.8% in January despite a lack of material stock-specific news. A-REITs are due to announce their latest quarterly earnings results in February.
• The best performing A-REITs included Charter Hall Retail REIT (flat) which was supported by the defensive nature of its grocery-anchored retail properties; and information storage and management company Iron Mountain (+5.4%).
• Underperformers included larger, relatively liquid A-REITs including Dexus Property Group (-6.7%) following strong gains during the 2016 calendar year; and GPT Group (-7.0%).
• Listed property markets offshore performed better, finishing the month in positive territory overall. The FTSE EPRA/NAREIT Developed Index (TR) increased by 0.6% in US dollar terms.

Global developed market equities

• Global developed equity markets mostly consolidated their post-election gains over January with some giveback late in the month off the back of protectionist policies announced by the Trump administration. The USD also gave back some of its recent gains with the DXY index ending the month down 2.6%.
• The MSCI World Index was up 2.4% in US dollar terms in the month of January and -2.4% in Australian dollar terms.
• In the US, the S&P500 (+1.8%), the Dow Jones (+0.5%) and the NASDAQ (+4.3%) were all stronger, with the Dow Jones reaching a new all time-high and surpassing 20,000 for the first time.
• On a sector basis, MSCI Materials (+6.7%), Information Technology (+4.5%) and Consumer Discretionary (+3.4%) were the best performers. MSCI Energy (-3.0%), Telecommunications (+0.2%) and Utilities (+0.6%) lagged behind the gains.
• Equity markets in Europe were mostly weaker over the month. The large cap Euro Stoxx 50 Index fell -1.8%. The best performing EU market was Germany (+0.5%) while Italy (-3.3%), Spain (-0.4%), France (-2.3%) and the Netherlands (-1.3%) all fell. The UK FT100 was also weaker down -0.6% in January.
• Asia markets were mixed, with the Japanese Nikkei 225 down -0.4% as the Yen appreciated 3.4% against the USD. However the other major markets rose over the month with Hong Kong (+6.2%), Singapore (+5.8%), Korea (+2.0%) and Taiwan (+2.1%) all making gains.

 Global emerging markets

• Emerging market equities recovered last month’s losses over January in USD terms, with the MSCI Emerging Market Index up 5.4%, out performance against DM equities.
• The weaker USD, higher commodity prices and stability in yields supported emerging markets, despite the increasing concerns around US Trade policy.
• MSCI EM Latin America gained 7.5% over the month with strong gains In Argentina (+12.8%) and Brazil (+7.4%).
• The MSCI EM Europe, Middle East and Africa (+2.1%) and MSCI EM Asia ex Japan (+6.2%) were also up on the month. The Shanghai Composite Index was also stronger, up 1.8%.

Global and Australian developed market fixed interest

• Political risk continues to be the key theme as we enter 2017. With the inauguration of President Trump and his first weeks in office watched closely by markets. The European election schedule this year is also adding to the political risks to be faced over 2017, with votes expected in France, Germany and the Netherlands to name a few.
• Bond yields in the UK and Europe moved the most in the month with 10-year gilts up 18pbs and German bunds up 23 bps. In the US, 10-year yields traded in a range of 25 bps but ended the month only one basis point higher. Japanese 10-year bonds rose 4 bps.
• Australian yields were range bound in the month and moved marginally lower, with the 10-year yield falling 5 bps to 2.71%. Towards the back end of the month the Q4 CPI data was released and came in weaker than expected. As a result, this pulled back the market’s prior move of pricing in the chance of RBA rate hikes in 2017.

Global credit

• Credit spreads ground tighter in the month amidst declining seasonal liquidity but continued to be resilient to the unfolding political events. After a sluggish end to 2016, investment-grade issuance picked up significantly in the month with the first week alone posting record levels of weekly issuance. Major issuance in the month included the US$17bn Microsoft bond offering and semi-conductor manufacturer, Broadcom’s US$13.55bn four-part bond deal.
• Specifically the Bloomberg Barclays Global Aggregate Corporate Index average spread moved 2 bps narrower to 1.23%. US credit moved 2 bps narrower, with the Bloomberg Barclays US Aggregate Corporate Index average spread down to 1.16%. In Europe, the spread on the Bloomberg Barclays European Aggregate Corporate Index was 3 bps narrower at 1.20%.
• Some intra-month volatility remained in US high yield credit spreads during the month. The spread on the Bank of America Merrill Lynch Global High Yield index (BB-B) narrowed by 12 bps to 3.18%. The high yield market continues to be impacted by increased downgrades particularly in the energy and mining sectors.
• Australian credit spreads narrowed in the month, with the average spread (relative to bond) of the Bloomberg AusBond Credit Index in 8 bps to +109 bps. This mostly reflected a delayed response to the optimism priced into global equity and credit markets, with Australian credit spreads having widened in December whereas they contracted elsewhere. Issuance in the first month of 2017 was the highest seen since 2009, with this supply creating its own demand and seeing spreads compress in AUD.

 

Market View – December 2016

By Carlos Cacho, Colonial First State – Analyst, Economic and Market Research

Summary

The Reserve Bank of Australia (RBA), as widely expected, left the cash rate unchanged at 1.5% at the December 2016 Board meeting.

The Australian dollar was weaker against the strengthening USD throughout December. The AUD ended the month down 2.4% against the USD at $US0.7208. The AUD was also weaker against the other major currencies.

The S&P/ASX 200 Accumulation Index continued its strong momentum in December, rising 4.1% to hit 12-month highs, with all market sectors finishing the month in positive territory.

US (and global) financial markets continued to be driven through December by the Presidential election victory for Donald Trump in early November. Financial markets focused on the stimulatory policies expected under President Trump, including significant company and income tax cuts, increased infrastructure spending and reduced regulation.

Most commodity prices remained well supported in December, helped by both the OPEC deal to try and limit oil supply and positive expectations. The price of West Texas Intermediate (WTI) Crude oil finished the month at $US53.72 per barrel, up 8.7% per month, while the price of Brent Crude oil was up 12.6% to $US56.82 per barrel.

Australia

The Reserve Bank of Australia (RBA), as widely expected, left the cash rate unchanged at 1.5% at the December 2016 Board meeting. The signals from the RBA continue to suggest that the hurdle to another rate hike is high and the most likely outcome will be rates on hold for all of 2017. As per usual, there was no Board meeting in January 2017.

The big news for Australia in December was that GDP growth for Q3 2016 printed -0.5% per quarter, well down from the revised +0.6% per quarter growth of Q2 2016. This was only the fourth quarterly negative print in the last 25 years and took the annual rate of growth down sharply to 1.8% per year from 3.1% per year in Q2 2016.

The only bright spots in the data were an increase in household consumption and inventories. All other key sectors of the economy, including net exports, private investment and public investment, contracted in Q3 2016.

Importantly, there was a 4.5% per quarter increase in Australia’s terms of trade over Q3 2016. As a result, real net disposable income rose a solid 0.8% per quarter in Q3 2016, taking the annual rate of increase to a strong 3.2% per year.

The November labour market report showed the unemployment rate up marginally at  5.7%, from 5.6%, but with total employment up 39.1k (+39.3k full-time, -0.2k part-time).

Australia’s Mid-Year Economic and Fiscal Outlook (MYEFO) showed a small improvement in the projected 2016/17 Budget (deficit now estimated at $A36.5 billion, -2.1% of GDP, vs the pre-election estimate of $A37.1 billion, -2.2% of GDP), but an accumulated $A10.4 billion widening of the budget deficit out to 2019/20. The government still maintains that the budget will be back in (small) surplus by 2020/21.

The deterioration in the budget position in the out-years was due to parameter changes – with policy decisions taken by the government since the election improving the budget position by around $A2.5 billion over the four year forecast period.

The major rating agencies reconfirmed Australia’s credit rating at AAA/Aaa after the MYEFO. But no doubt they will be watching closely for further improvements in the May 2017 Budget. At the moment the position of the AAA feels more like a stay of execution, rather than a reprieve.

US

US (and global) financial markets continued to be driven through December by the Presidential election victory for Donald Trump in early November. Financial markets focused on the stimulatory policies expected under President Trump, including significant company and income tax cuts, increased infrastructure spending and reduced regulation. The more concerning policies around trade, immigration and climate change look to be considered secondary factors at this stage.

The other big news impacting on markets in December was the Federal Reserve’s 15 December meeting. As widely expected, the Fed raised the Fed Funds target rate by 25 bps to a 0.5% to 0.75% range. This was the second rate hike from the Fed since December 2015 and indeed, only the second rate hike in 10 years. The Fed’s policy decision was unanimous.

The surprise in the Fed’s decision was a slight upward drift in the FOMC’s median projection for the Fed Funds rate in the years ahead, ie. the ‘dots’, with three rate hikes now expected for 2017 (as opposed to two) and a small increase in the long-run ‘dot’ to 3.0% (from 2.9%).

These moves came despite only very modest changes to the key economic forecasts. In her press conference, Fed Chair Yellen went out of her way to emphasise that the changes to the ‘dots’ were only very minor. The Fed Chair also made the point that the raising of interest rates was a sign of the confidence in the economy.

Asked about the potential of a significant fiscal policy easing under President Trump, the Fed Chair refused to be drawn on the implications for monetary policy – as she did not want to pre-empt what that fiscal policy easing would look like and/or what impact it would have on the economy. Clearly this will be a big part of the Fed’s reaction function in the coming years.

We have made some major changes to our expectations for the Fed Funds rate – to reflect the expansionary, stimulatory and, ultimately, inflationary policy of the Trump administration.

Given that we now expect the US economy to experience a significant easing of fiscal policy from late 2017 onwards, which pushes inflation higher than previously expected and brings forth the need for more tightening from the Fed, we now expect two rate hikes in 2017 to be followed by three rate hikes in 2018 (previously two) and three rate hikes in 2019 (previously two). This will give a peak in the Fed Funds target rate in 2019 of 2.5% to 2.75%, i.e. 50 bps higher than our previous peak forecast.

We now expect, however, two rate cuts in 2020 (previously no change) as the tightening of financial conditions over 2018-2019 (from a higher USD, higher bond yields and a higher Fed Funds rate), combines with President Trump’s anti-trade and anti-immigration policies to bring about an economic downturn.

Employment was solid again in November, increasing by 178k (from a revised 142k in October). The unemployment rate dropped to a new low in the cycle of 4.6% (from 4.9%). However, average hourly earnings declined -0.1% per month, taking the annual rate down to 2.5% per year from 2.8% per year.

Inflation continued to increase at a moderate pace with headline CPI up just 0.2% per month in November and the annual rate increasing to 1.7% per year (from 1.6%). The core CPI also increased by 0.2% per month, with the annual rate unchanged at 2.1% per year.

The Fed’s preferred measure of underlying inflation, the core Personal Consumption Expenditure (PCE), edged down to 1.6% per year in November, from 1.7% previously.

Europe

In early December the European Central Bank (ECB) announced a longer-than-expected extension of its asset-purchase/quantitative easing (QE) program out to December 2017, well beyond the previous time-frame of March 2017. However, the QE program will, from April 2017 onwards be reduced to a monthly pace of €60 billion, rather than the current pace of €80 billion per month.

The ECB also made changes to the operations of its QE program that will allow it to continue to purchase assets for a longer period – if that should prove necessary. All official interest rates were held unchanged, with the Deposit Facility at -0.4%. In announcing the changes the ECB President, Mario Draghi, delivered a dovish message, strenuously denying that a ‘tapering’ of monetary policy easing was in place.

European data continued to show modest improvement in December, but with low inflation and concerns over the banking system remaining. Indeed, the oldest bank in the world, Monte dei Paschi di Siena – founded 1472 – had to request a bailout from the Italian government.

The EU unemployment rate dropped to 9.8% in October, from 9.9%, the lowest rate since mid-2009. GDP growth for Q3 2016 was 0.3% per quarter, with the annual rate up marginally to 1.7% per year.

CPI inflation was unchanged at 0.6% per year in November, with the core inflation rate also unchanged at 0.8% per year.

In politics, the focus in December was on the failed referendum in Italy that was designed to make it easier for the government to implement (much needed) economic reforms. The failure of the referendum saw Prime Minister Renzi resign – to be replaced by former Foreign Affairs Minister Paolo Gentiloni.

UK

Data in the UK continued to show an economy outperforming post-Brexit expectations. The Bank of England (BoE) held the cash rate steady at 0.25% in mid-December and maintained the pace of their QE program at GBP435 billion. The BoE continues to signal that policy is unlikely to be changed in the period ahead.

The annual rate of inflation rose to 1.2% per year in November (from 0.9%), with the core CPI up 1.4% per year in November (from 1.2%). The unemployment rate stayed at 4.8% in October, with average weekly earnings up to 2.5% per year in October from 2.4%. GDP for Q3 2016 came in at a final reading of 0.6% per quarter, taking the annual pace of growth to 2.2% per year.

NZ

The biggest news in New Zealand in December was the shock resignation by Prime Minister John Key. Key had been PM since November 2008 and was widely regarded as very successful. He was replaced by former Finance Minister Bill English as Prime Minister.

Data in New Zealand continued to show an economy doing well given the global circumstances. House prices were up 12.4% per year in November (from 12.7%), while building permits jumped 2.6% per month in October (from -0.2% per month in September). Q3 2016 GDP showed strong growth of 1.1% per quarter, taking the annual pace to 3.5% per year (from 3.4%).

 Japan

The Bank of Japan (BoJ) held the cash rate steady at -0.1% in December and the 10yr JGB target rate at 0.0%.

GDP growth was 0.3% per quarter in Q3 2016, giving an annualised rate of 1.3% per year. The Tankan large manufacturing index rose to +10 in Q4 2016 (from +6), with the large non-manufacturing index steady at +16.The annual rate of headline inflation jumped to 0.5% per year in November (from 0.1% per year), but with the core pace of inflation down marginally to 0.1% per year from 0.2% per year previously.

China

Activity data in China was relatively stable over the month. Industrial production was at 6.2% per year for November (from 6.1%), while Fixed Asset Investment was steady at 8.3% per year. Retail sales were stronger, rising to 10.8% per year in November from 10.0% per year in October.

Inflation continued to increase in November, rising to 2.3% from 2.1% per year. China’s PPI increased by a very solid 3.3% per year in November, well up from 1.2% in October and the highest level since December 2011.

New Yuan lending rose by Y794.6 billion in November, from Y651.3 billion in October, while aggregate financing jumped to Y1,740 billion in November, from Y886.5 billion in October.

Australian dollar

The Australian dollar was weaker against the strengthening USD throughout December. The AUD ended the month down 2.4% against the USD at $US0.7208.

The AUD was also weaker against the other major currencies: down -1.1% against the GPB, -0.1% against NZD, -1.9% against the EUR and -0.4% vs the Yen. The TWI ended the month down 2.1% at 63.9.

The AUD continues to be driven by its relative position against the stronger USD, but supported by improvements in commodity prices and general expectations that the RBA interest rate cutting cycle is at an end.

 USD STRENGTH TRUMPS INCREASING COMMODITY PRICES   Source: Bloomberg as at 31 December 2016

 Commodities

Most commodity prices remained well supported in December, helped by both the OPEC deal to try and limit oil supply and positive expectations, especially on infrastructure spending, from a Trump Presidency.

The price of West Texas Intermediate (WTI) Crude oil finished the month at $US53.72 per barrel, up 8.7% per month, while the price of Brent Crude oil was up 12.6% to $US56.82 per barrel.

Gas prices were also stronger, with the US natural gas Henry Hub futures price up 11.1% to $US3.72/MMBtu.

Iron ore prices were stronger (again) over December on increased demand from China and the expectation of infrastructure spending in the US. The spot iron ore contract (Qingdao 62% Fe fines) rose by 9.4% to US$78.87/t in December.

Base metals decreased with the London Metals Exchange (LME) Index falling by 5.0%. Lead (-14.7%), nickel (-10.9%), copper (-5.0%), zinc (-4.7%) and aluminium (-2.3%) all lost momentum. Tin increased slightly by 0.4%.

Precious metals prices, which are generally more sensitive to changes in US interest rate policy, declined in December. The spot gold price fell by 1.8% to end the year at US$1,152.27/oz.

IRON ORE RISES WITH INFRASTRUCTIRE EXPECTATIONS  Source: Bloomberg as at 31 December 2016

Australian shares

The S&P/ASX 200 Accumulation Index continued its strong momentum in December, rising 4.1% to hit 12-month highs, with all market sectors finishing the month in positive territory.

In contrast to recent months, bond proxy sectors, including Utilities (+8.7%) and A-REITs (+6.8%), were among the market’s leading performers. The Utilities sector was led higher by Hong Kong-based Cheung Kong Infrastructure’s $A7.3 billion cash bid for DUET Group.

Energy (+6.1%) continued its strong run, as companies in the sector benefitted from a rising oil price. The market is optimistic that a deal between OPEC and non-OPEC members to cut oil production in early 2017 will help drain the global supply glut.

Sentiment continues to improve towards banking stocks, with Financials (+5.5%) once again posting healthy gains on expectations that rising interest rates will likely improve profitability for the banks, while a steepening yield curve is benefitting insurance companies.

Rising commodity prices, particularly iron ore, helped support Australia’s Materials sector (+3.9%). Lead indicators for iron ore remain positive looking ahead into 2017.

Health Care (0.9%) continues to struggle, underperforming the broader market. The sector was led lower by Sirtex Medical, which lost around half its value after posting a negative trading update.

Listed property

The S&P ASX 200 A-REIT index rallied sharply during December, returning +6.8% as bond yields stabilised.

Gains were led by Growthpoint Properties Australia (+9.9%) and Scentre Group (+9.4%). Growthpoint Properties rose after raising its distribution guidance for the 2017 financial year by 5%. Scentre Group, which owns 34 Australian shopping centres, was supported by robust rental growth and evidence of healthy leasing demand in its key markets of Sydney and Melbourne.

Listed property markets offshore also gained in December. The FTSE EPRA/NAREIT Developed Index (TR) increased by 3.1% in US dollar terms.

Global shares

Global developed equity markets were stronger again over December as the ‘Trump rally’ continued on expectation of expansionary fiscal policy, tax cuts and reduced regulation in the US. The USD was also stronger on the month with the DXY index up 0.7%.The MSCI World Index was up 2.3% in US dollar terms in the month of December and 4.8% in Australian dollar terms.

In the US, the S&P500 (+1.8%), the Dow Jones (+3.3%) and the NASDAQ (+1.1%) were all stronger.

On a sector basis, MSCI Financials (+3.9%), Utilities (+4.2%), Energy (+3.5%) and Telecommunications (+5.8%) were the best performers. MSCI Materials (+1.4%) and Industrials (+0.8%) lagged behind the gains, but were still positive on the month.

Equity markets in Europe were also stronger over the month. The large cap Euro Stoxx 50 Index put on a solid 7.8%. The best performing EU markets were; Italy (+13.6%), Spain (+7.6%), Germany (+7.9%), France (+6.2%) and the Netherlands (+5.7%). The UK FT100 was also up a solid 5.3% in December. Asia markets were mixed, with the Japanese Nikkei 225 up a strong 4.4% as the Yen depreciated 2.2% against the USD. Other gains in Asia were seen in Malaysia (+1.4%), Korea (+2.2%), Thailand (+2.2%), Indonesia (+2.9%) and the Philippines (+0.9%).

Declines in Asia were seen in; Singapore (0.8%), China (-4.5%), Hong Kong (-3.5%), India (-0.9%) and New Zealand (-0.2%). Taiwan was close to flat on the month.

 EQUITY MARKETS RALLY ON TRUMP WIN

 Global emerging markets Source: Bloomberg as at 31 December 2016

Emerging market equities were weaker (again) over December in USD terms, with the MSCI Emerging Market Index down -0.1%, continuing the underperformance against DM equities.

USD strength, higher bond yields and concerns around US trade policy all continued to weigh on emerging markets, despite the strength in commodity prices.

MSCI EM Latin America gained 0.5% over the month, while MSCI EM Europe, Middle East and Africa actually gained 7%. MSCI EM Asia ex Japan was weaker at -2.3% on the month. The Shanghai Composite Index was also weaker, down 4.5%.

Market Watch – November 2016

Economics overview

Australia: As mentioned last month, the Reserve Bank of Australia (RBA) Board meet on 1 November 2016 and as widely expected, the cash rate was held unchanged at 1.5%. The next meeting is scheduled for 6 December 2016, no change is expected by markets.

Over the month RBA Governor Phil Lowe delivered an important speech at a Committee for Economic Development of Australia event. The Governor seems to have shifted the RBA to a ‘neutral’ bias on monetary policy – away from the previous easing bias.

Governor Lowe seems to be taking a more cautious/hawkish approach to Australia’s debt levels, especially in the context of an already very low interest rate environment and the uncertainties/imbalances building up in the global economy.

The key line from the RBA Governor’s speech was “…it is unlikely to be in the public interest, given current projections for the economy, to encourage a noticeable rise in household indebtedness, even if doing so might encourage slightly faster consumption growth in the short term.” This suggests the hurdle for another rate cut is significant and higher than previously anticipated.

The Q3 Capex survey released in early December was weaker than expected, -4%/qtr, the decline was mostly related to weaker construction of buildings and structures (-5.7%/qtr). Investment in Plant and Equipment also fell (-1.9%/qtr), reinforcing expectations of a weaker Q3 GDP outcome.

Forward looking components of the capex survey were however slightly better. Total capex intentions for 2016/17 were upgraded to A$107bn from A$105bn, implying an annual fall of 16%/yr compared to 19%/yr previously.

The October labour market report showed the unemployment rate stable at 5.6%, driven by continued weakness in participation which remained at a downwardly revised 64.4%, a 10 year low.

While the number of people employed rose by 9.8k, 20k of negative revisions to last month’s data meant there was a net loss of 10k. Full time employment recovered some of last month’s loss but the 42k gain was not enough to offset the revised 74k fall in September (the largest fall in fulltime employment in the series’ history). 2016 has seen a marked slowing in employment growth to 4.3k/mth, compared to an average of 24.8k/mth over 2015 along with the loss of 90k full time jobs.

US: The big event over the month was of course the US Election and with it the second time in 2016 that the global geo-political landscape has shifted dramatically and traditional opinion polling has been shown to be severely lacking.

The election result led to some initial market volatility but has since been taken positively with the market focusing on the expansionary and likely inflationary aspects of a Trump Presidency, particularly the potential for tax cuts and infrastructure spending.

As mentioned last month the US Federal Open Market Committee (FOMC) meet on 1-2 November 2016 and as widely expected left the official Fed Funds target rate unchanged at 0.25%-0.5%.

The November meeting minutes in addition to Public statements from various Fed officials over the month continue to reinforce the view that a 25bps rate hike is likely at the 13-14 December FOMC meeting. This has been further strengthened by the supportive market reaction to the Presidential Election which was one of the major uncertainties and market risks that could have derailed such a move.

Employment was slightly weaker than expected in October increasing by 161K, compared to the 173k expected. The unemployment rate decreased 0.1% to 4.9%, from 5.0%, aided by a 0.1% decline in the participation rate to 62.8%. The underemployment rate (unemployment plus those that want more work) also fell 0.2% to 9.5%, the lowest level since 2008. The elevated level of underemployment has been a concern for the Fed and the decline is another positive sign of reducing labour slack.

Average hourly earnings data for October were stronger than expected at 0.4%/mth, the annual rate increased 0.2% to 2.8%/yr, the highest level since 2009. Another measure of wage growth, the Atlanta Fed Wage Growth Tracker, also reach a new cyclical high over the month (+3.9%/yr), suggesting that a tighter labour market is beginning to drive wages.

Inflation continued to increase at a moderate pace with headline CPI up 0.4%/mth in October and the annual rate increasing to 1.6%/yr. Core CPI was slightly weaker than expected increasing 0.1%/mth with the annual rate falling 0.1% to 2.1%/yr driven by an outlier drop in airfares and soft medical care prices.

The Fed’s preferred measure of underlying inflation, the Core Personal Consumption Expenditure, remained stable at 1.7%/yr in October, around the level is has remained for most of 2016.

Durable goods orders, a key indicator for the industrial sector, where significantly stronger than expected in October increasing 4.8%/mth (compared to an estimate of +1.7%/mth). While the headline numbers were boosted by a surge in aircraft orders, durable goods excluding transport were also stronger than expected rising 1%/mth with an additional +0.7% of revisions to prior month data. This data suggests we are seeing a stabilisation, if not a recovery, in the industrial sector which has struggled with the fall in energy investment over the last 2 years.

Retail sales rose a higher than expected 0.8%/mth in October with an additional +0.3% in net revisions making for a significantly better than expected report and driving an increase in the annual rate to 4.3%/yr from 3.2%/yr in September. Strength was broad based with the largest contributions coming from autos (+1.1%/mth), building materials (+1.1%/mth), non-store retail (+1.5%/mth) and miscellaneous (+2.4%/mth).

Europe: The European Central Bank (ECB) did not meet over the month of November, the next meeting is scheduled for 8 December 2016. The ECB is widely expected to extend their asset purchase program, which is scheduled to end in March 2017, at the December meeting.

European data improved with the Markit Manufacturing and Services PMI’s both increasing over November. The Manufacturing PMI increased to 53.7, the highest level since early 2014 and the Services PMI increased to 54.1, the highest since late 2015.

In France, François Fillon has unexpectedly won Republican Party presidential primary. He is now expected to face off against the Front National’s Marine Le Pen at the second round of the French Presidential elections scheduled 7 May 2017. While current polling suggests that Fillon should win 67%-71% of the vote this year has shown that it can be dangerous to put too much faith in opinion polls.

UK: The Bank of England (BoE) Monetary Policy Committee (MPC) left monetary policy unchanged at its 3 November 2016 meeting.

The tone of the minutes were notably more hawkish than expected noting a limited tolerance for above target inflation and stressing the ability of monetary policy to respond in either direction to changes in the outlook. The MPC made it clear that the bar for further easing is higher than previously thought and that the next move is just as likely to be up as down.

CPI data was a bit softer than expected with inflation increasing by 0.1%/mth in October, below the 0.3%/mth expected. The annual rate fell slightly to 0.9%/yr from 1%/yr, core was also slightly weaker down to 1.2%/yr from 1.5%/yr. The weaker than expected monthly print was driven by softer services and food prices. The fall in annual rates was largely driven by volatility in prices a year ago, particularly clothing inflation which fell to -0.7%/yr from +1.1%/yr in September.

NZ: The Reserve Bank of New Zealand (RBNZ) meet over on 10 November 2016 and as largely anticipated cut interest rates 0.25% to a new all-time low of 1.75%.

Policy guidance in the accompanying statement was more neutral but did not completely discount the risk of further easing; “policy settings, including today’s easing, will see growth strong enough to have inflation settle near the middle of the target range. Numerous uncertainties remain…and policy may need to adjust accordingly.”

Canada: The Bank of Canada (BoC) did not meet over the month, the next meeting is scheduled for 8 December 2016.

Employment data over the month showed unemployment steady at 7% and the participation rate up 0.1% to 65.8%, despite 44k new jobs.

Japan: Inflation picked-up slightly over the month with the headline rate increasing to 0.1%/yr from -0.5%/yr, the first time it has been above 0% since February. Core CPI, excluding food and energy, also improves slightly increasing to 0.2%/yr. Both measures still remain well below the Bank of Japan’s 2% target.

China: Activity data was stable to slightly weaker over the month. Industrial production was stable at 6.1%/yr while Fixed Asset Investment increased 0.1% to 8.3%/yr. Retail sales were weaker, falling to 10%/yr from 10.7%/yr in September. The weakness is October however may be related to postponed spending as “Singles Day”, the largest shopping/sales day in China and now the world, occurs on the 11^th of November.

Inflation continued to increase in October, rising to 2.1%/yr from 1.9%/yr. Food price inflation continues to be the major driver of inflation, rising to 3.8%/yr in October from 3.3%/yr in September.

Chinese producer prices as measured by the PPI increase 1.2%/yr in October, up from 0.1%/yr in September and the highest level since December 2011.

 Australian dollar

• The Australian dollar was mixed against most major currencies over November. The AUD was down 2.8% against the USD to $US0.7394 and also weaker against the sterling (-4.92%) and NZ dollar (-1.87%), but rose against the euro (+0.53%), yen (+5.65%)
• The positive dynamics of higher commodity prices where outweighed by USD strength to see the AUD weaker on the month.

Commodities

• Commodity prices, with the exception of precious metals, were mostly stronger over November with significant moves in industrial metals following the election of Donald Trump and the expectation of increased infrastructure spending.
• The price of West Texas Intermediate Crude finished the month at $US49.44/bbl, up 5.5%, while the price of Brent was up 5.2% to $US51.84/bbl. Oil prices weakened early in the month on scepticism around the potential for an OPEC deal, before increasing close to 10% on the last day of the month after the announcement of a production cut.
• At OPEC’s 30 November meeting in Vienna they announced a 1.2mbbl cut to oil production to 32.5mbbl (roughly equal to production around the start of 2016), as expected Nigeria, Libya and Iran will be except from cuts. The agreement will be in effect for 6 months, starting January 2017, with the option to extend it a further 6 months.
• While the market reacted positively to the news there is still scepticism around the ability to enforce and monitor production levels and on the potential reaction of other producers to an increase in oil prices.
• Gas prices were also stronger with the US Henry Hub spot price up 18% to $US3.295/MMBtu.
• Iron ore prices were stronger over November on increased demand from China and the expectation of infrastructure spending in the US. Prices were up 12.0% to $72.08/metric tonne, as measured by the benchmark price of iron ore delivered to Qingdao China.
• Copper (+17.6%), Zinc (+9.7%), Nickel (+5.8%) and Lead (+14.0%) rose over November while Aluminium (-0.7%) and Gold (-7.8%) were weaker.

 Australian equities

• The S&P/ASX 200 Accumulation Index posted strong gains, rising 3.0%, with most sectors finishing the month in positive territory.
• Rising commodity prices, particularly iron ore, supported Australia’s Materials sector (+2.5%), with the large miners following the iron ore price higher. BlueScope Steel also posted strong gains after upgrading its 1H17 earnings outlook at its AGM.
• Energy (+3.7%) was the best performing sector in the ASX 200, as oil-exposed companies, including Santos and Origin Energy, benefitted from a rising oil price.
• Financials (+6.1%) outperformed, as sentiment continues to improve towards the sector. Rising interest rates will likely improve profitability for the large banks.
• Bond proxy sectors, including A-REITs (+0.8%) and Utilities (+3.6%), steadied after three consecutive months of significant losses. Rising bond yields and a potential December rise in US interest rates now look to be fully priced in.
• Health Care (-1.4%) also stabilised following a torrid October. Many companies in the sector, including CSL, Cochlear and ResMed, earn a significant proportion of their earnings from overseas, particularly in the US, so will benefit from a strengthening US dollar.

Listed property

• The S&P ASX 200 A-REIT index fell during the first half of the month against a backdrop of turbulent financial markets, before recovering ground to finish November 0.8% higher.
• Retail A-REIT Westfield Corporate (+2.5%) was amongst the top performers, after announcing positive sales growth at its third quarter update, and on the view that its development pipeline could support further earnings growth.
• Charter Hall Group (-4.0%), which develops commercial, residential and industrial properties, underperformed despite announcing higher earnings guidance for its 2017 financial year.
• Listed property markets offshore declined in November. The FTSE EPRA/NAREIT Developed Index (TR) fell by -2.7% in US dollar terms.

Global developed market equities

• Global developed equity markets were mostly stronger over November as “risk on” sentiment driven by the election of Donald Trump and the expectation of expansionary fiscal policy and tax cuts drove markets higher. The USD was also stronger on the month with the DXY index up 3.9%.
• The MSCI World Index was up 1.3% in US dollar terms in the month of November and 4.2% in Australian dollar terms.
• In the US, the S&P500 (+3.4%), the Dow Jones (+5.4%) and the NASDAQ (+2.6%) were all stronger, driven by the expectation of expansionary (and potentially inflationary) fiscal policy from President Elect Trump.
• On a sector basis, MSCI Financials (+7.55%), Energy (+5.10%) and Industrials (+3.52%) were the best performers moving higher with rising yields, oil prices and expectations of fiscal expansion and infrastructure spending respectively. MSCI Utilities (-6.51%) and Consumer Staples (-5.26%) were the worst performers, impacted by rising yields and concerns around trade respectively.
• Equity markets in Europe were slightly weaker over the month. The large cap Stoxx 50 Index was down 0.1%. Greece (+6.4%) and France (+1.5%) were stronger while Italy (-1.1%), Spain (-5.0%), the UK (-2.5%) and German (-0.2%) all fell. Political concerns around the election of Donald Trump and European elections next year along with the Italian referendum this Sunday impacted markets.
• Asia markets were mixed with the Japanese Nikkei 225 up +5.1% as the Yen depreciated 8.7% against the USD and Singapore (+3.2%) higher as well while Taiwan (-0.5%) and Honk Kong’s Hang Seng (-0.6%) fell, potentially related to trade concerns and EM weakness.

Global emerging markets

• Emerging market equities were weaker over November in USD terms with the MSCI Emerging Market Index down 4.7%    underperforming DM equities.
• USD strength, higher bond yields and concerns around US trade policy all weighed emerging markets, despite the continued strength in commodity prices.
• MSCI EM Latin America was the worst performing region over the month falling 10.81% in USD terms, while MSCI EM Europe, Middle East and Africa (-4.98%) and MSCI EM Asia (-2.94%) were also down. The Shanghai Composite Index was stronger, up 4.8%.

Global and Australian developed market fixed interest

• The world watched with bated breath in November as the results of the US Presidential Election were announced. The surprise appointment of Donald Trump dominated markets as they reacted to the perceived impact the results would have on the economy.
• There was a short-lived risk-off reaction in equity and bond markets on the Presidential result, but a Republican clean sweep led markets to think that the President Elect will be able to push through significant fiscal stimulus. On the back of this perceived pro-growth environment, inflation expectations and equities resumed their move higher. This positive sentiment caused US ten year yields to rise 56bps over the month, with the majority of the upward movement following the election.
• The Italian referendum in early December and the French elections next year loom as key event risks in the period ahead. As such German bond yields saw more subdued rises reflecting the European nature of some of these risks and a switch out of riskier peripheral European Government bond markets.
• The sharp move higher in Australian 10-year government bond yields in November was largely driven by the move in US yields. However there were some local developments during the month, particularly comments from RBA Governor Phil Lowe, which also supported the rise in yields.
• As expected the biggest moves in 10-year yields were in the US (+56 bps) with Australia following suit (+38 bps). Smaller rises were seen in the UK, (+17 bps), Germany (+11 bps) and Japan (+7 bps).

 Global credit

• Credit spreads did not benefit to the same degree as equities in November, broadly trending sideways despite the Trump induced government bond sell-off. Hiding underneath this however was some underlying sectoral shifts on the back of the campaigned policy measures and the rise in energy and commodity prices over the month. Demand for spread product generally remains buoyed by lingering accommodative global monetary policy and low issuance. However, geopolitical event risk in the upcoming European elections is keeping spreads range bound for now.
• Specifically the Barclays Global Aggregate Corporate Index average spread moved 2 bps wider to 1.30%. US credit moved only 2 bps narrower with the Barclays US Aggregate Corporate Index average spread down to 1.23%. In Europe, the spread on the Barclays European Aggregate Corporate Index was 17 bps wider to 1.26% due to the uncertainty of the upcoming Italian referendum in early December and continued talk of potential tapering from the European Central Bank.
• Some intra-month volatility remained in US high yield credit spreads during the month. The spread on the Bank of America Merrill Lynch Global High Yield index (BB-B) widened to 4.18% early on before narrowing significantly, closing 32 bps narrower at 3.63% with 10 bps of the drop on the back of the OPEC deal. The high yield market continues to be impacted by increased downgrades particularly in the energy and mining sectors.
• Australian credit spreads saw little movement intra-month with the average spread (relative to bond) of the Bloomberg AusBond Credit Index 6 bps wider, closing at +113 bps. Credit spreads drifter wider over the month in financial names, as demand waned ahead of the political uncertainty in Europe. However demand for Australian non-financial credit remains solid, as issuance continues to be sparse.