Global equity markets posted negative returns in August 2019. All major stock exchanges fell over the month with the UK and Japanese stock markets registering the largest falls of 4.1% and 3.7% respectively. The value of the Australian Dollar decreased against most major currencies, and global investment grade credit spreads broadly expanded (i.e. the market’s perceived riskiness of lending to high quality companies increased).

The US-China trade war escalated further with the US announcing early in August further tariffs of 10% on $300 billion of Chinese imports effective from 1 September. This news came as a surprise to many as reportedly negotiations have been “constructive”. By mid-August the Trump administration stated it would delay the tariff imposition until December, however, this did not last long and by the end of the month a new tariff on $110 billion of Chinese imports kicked in and a further 15% duty on consumer goods was imposed. China retaliated with a tariff increase on $75 billion of US goods.

August was a month that saw extreme developments on the Brexit front. The Prime Minister of the UK, Boris Johnson, approached the Queen to prorogue (suspend) parliament for 5 weeks in the leadup to the Brexit deadline of 31 October. This length of prorogation hasn’t occurred since the 1980s. Parliament’s sitting days before the 31 October deadline have been drastically reduced by this course of action. Members of Parliament have pushed for a court ruling to stop prorogation, however, the courts are not expected to overturn the Queen’s decision to follow the government’s request. The opposition leader, Jeremy Corbyn, has announced his plan to table a vote-of-no-confidence shortly after Parliament returns against Boris Johnson to form a new government and seek an extension to the deadline with the EU.

Hong Kong protests have escalated over recent months. The busy international airport has been closed on weekends due to  anti-China protests. The initial protests were in relation to a bill that amended the Hong Kong extradition law led to fear that Hong Kong citizens and international travelers may be tried under the mainland Chinese judicial system. Since the initial demonstration to remove the extradition bill, the protestors’ lists of demands have grown to include free elections and an independent investigation into police brutality, among other items. Carrie Lam, the chief executive of Hong Kong, has come under fire for not allowing the protestors a platform to negotiate. Broader impacts on whether (mainland) China will intervene await to be seen.

Equities

Equity markets across the board were volatile and produced negative returns in August. Developed markets returned -2.0% in local currency terms, whilst emerging markets continued to underperform developed markets returning -2.5%. 

The Australian stock market generated a -2.4% return during August.

The highest returning sector in Australia was Health Care, and Real Estate was the only other sector with a positive return. The worst performing sectors were Materials, Energy and Communication Services. 

From a developed market sectoral perspective, the returns for the month were mixed but skewed towards the downside. Utilities and Consumer Staples were the best performing sectors with positive returns, whilst Health Care remained relatively neutral.  Energy, Financials and Materials were the worst performing sectors.

Bonds

Both the two-year and ten-year Australian government bond yields fell once again, by 0.1% and 0.3% respectively. Falling bond yields are positive for short term bond investment returns.

Overseas, both two-year and ten-year yields fell in all major developed economic regions. Yield curves in all major economic countries flattened with ten-year bond yields decreasing further than their corresponding two-year term yield. This saw the two and ten year yield curve invert in the US, an indicator of recessions, which has generally been proven to be accurate.

Currencies

The Australian dollar weakened against the United States Dollar, Japanese Yen, Euro, British Pound and Swiss Franc, due to a bearish economic outlook on Australia from a global perspective. However, the AUD increased against the Chinese Renminbi during August due to downward pressure on the Chinese currency following escalation in the trade war.

The Australian Dollar finished the month at 0.6733 US Dollars, decreasing by approximately 1.1 US cents over the month.

Commodities

The price of WTI crude oil decreased by 5.9% in August whilst Brent crude oil fell even further, as deteriorating global growth forecasts weighed on the demand for oil. 

Industrial metals dropped 1.5% on average, with iron ore plummeting by 25.9% in value following reduced Chinese demand and Brazilian iron ore supply increasing. Of the precious metals, gold and especially silver saw strong returns of 7.5% and 13.0% respectively for the month.

Performance of key markets:

Asset class	Index	Month (% change)	FYTD (% change)	1 year (% change)
Australian Shares	S&P/ASX 200 Acc. Index	-2.4	0.5	9.0
International Shares	MSCI World Ex Aust Unhedged A$	0.3	2.6	7.6
International Shares	MSCI World Ex Aust Hedged A$	-2.0	-0.9	0.5
US Shares	S&P 500 Index	-1.6	-0.2	2.9
UK Shares	FTSE 100 Index	-4.1	-1.9	1.4
Japanese Shares	Nikkei 225 Index	-3.7	-2.6	-7.5
Australian Listed Property	S&P/ASX 200 A-REIT Index	1.2	3.8	19.4
Australian Fixed Interest	Bloomberg AusBond Composite Index	1.5	2.5	11.2
Australian Cash	Bloomberg AusBond Bank Bill Index	0.1	0.2	1.8
Currency	AUD/USD	-1.6	-4.1	-6.3

Returns are for periods to 31 August 2019. Past performance is not an indication of future performance.