Equities

Global equity markets fell sharply in the first half of the month, with the US Dow Jones Index plunging a record 1175 points on 5 February 2018, but then staging a partial recovery in the second half of the month. The US share market ended the month about 4% lower than the start. Concerns about rising wages in the US, the prospect of future inflation and interest rate rises were the main catalysts for the sell-off. It should be noted however that the weakness in February followed an extraordinarily strong period of performance in 2017 calendar year and the first month of 2018.

The equity market sell off and ensuing volatility saw the CBOE Volatility Index (VIX) surge to the highest level since 2015, seeing significant losses for investors exposed to products reliant on perennially low volatility. On a global basis, the best performing sector was once again IT, while the worst performing was Energy, the latter impacted by oil price falls.

Japanese equities were weaker, and European equities even more so. This was likely driven by a decline in the European Purchaser Manager’s Index (PMI), a measure designed to be predictive of future corporate spending. In addition, the stronger Euro led some export companies to caution around future profits.

By contrast, the Australian share market posted a modest rise this month. Health Care was the strongest performer, as the market responded well to earnings results from blood products group CSL, and of ResMed, the latter involved globally in the design and distribution of sleep apnoea treatment devices. Telecommunications was weakest sector, dragged down by Vocus (-18.7%) and Telstra (-5.7%).

Global Bond sell-off continues

The biggest story of the month was the global sell-off in the bond market, driven by a large rise in U.S. interest rates. In the year to January 2018, wages of American workers grew at 2.9%, the fastest annual rate since 2009, whilst unemployment remained at historical low levels. This likely triggered the rise in US interest rates. Yields rose to near their highest level since the 2013 ‘taper tantrum’, when investors panicked on news of an imminent tapering of US monetary policy.

Australian 10-year Government bonds yields fell below their US counterpart for the first time in 18 years; reflective of the policy differential between the two central banks. Australian bond yields fell one basis point in the month, in contrast to the 14 basis point rise in US yields to 2.86%.

In other central bank news, Jerome Powell was sworn in as Chair of the Federal Reserve on 5 February, while Japanese Prime Minister Shinzo Abe reappointed Haruhiko Kuroda for another term as Governor of the Bank of Japan on 16 February.

Currencies

The US Dollar strengthened in February against most major currencies, likely driven by increased pricing of Federal Reserve rate hikes following stronger than expected economic data. The exception was the Japanese yen, which strengthened marginally. This was likely reflective of the yen’s status as a safe haven currency in an environment characterised by increased volatility and associated risks, in addition to speculation the Bank of Japan may moderate its easing policies later this year. Despite the rise in commodity prices, the Australian Dollar weakened against most major currencies, suggesting markets may be beginning to focus more on the spread of Australian bonds relative to those in the U.S.

Commodities

Bulk commodity prices, namely iron ore and coal, lifted through February on restocking and seasonal weakness in supply, while oil prices declined on global risk-off sentiment and higher 2019 US oil production estimates. Gold prices fell despite the more conservative environment, most likely on the back of US dollar strength.

Performance of key markets 

Asset class	Index	Month (% change)	FYTD (% change)	1 year (% change)
Australian Shares	S&P/ASX 200 Acc. Index	0.4	8.3	10.1
International Shares	MSCI World Ex Aust Unhedged A$ Net Return	-0.4	9.9	16.0
International Shares	MSCI World Ex Aust Hedged A$ Net Return	-3.7	10.1	14.7
US Shares	S&P 500 Index	-3.9	12.0	14.8
UK Shares	FTSE 100 Index	-4.0	-1.1	-0.4
Japan Shares	Nikkei 225 Index	-4.5	10.2	15.4
Australian Property	S&P/ASX 200 A-REIT Index	-3.3	2.7	-0.2
Australian Fixed Interest	Bloomberg AusBond Composite Index	0.3	1.4	2.9
Australian Cash	Bloomberg AusBond Bank Bill Index	0.1	1.1	1.7
Currency	AUD/USD	-3.6	0.9	1.4

Returns are for periods to 28 February 2018. Past performance is not an indication of future performance.

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