Markets posted strong returns in February 2019, continuing the turn-around in performance since the dismal final quarter of 2018. The Australian share market rose 6% over the month, the strongest of major developed peers, whilst the Australian Dollar and credit spreads both fell.

Early February saw frantic negotiations between US President Donald Trump and the Republican and Democratic parties in an attempt to prevent a resumption of the longest government shut down in US history. By the middle of the month an agreement had been reached, with the President speaking out about his disappointment that it didn’t contain more funding for border security. In a last ditch attempt to build the wall which formed a major part of his campaign platform, President Trump declared a national emergency on the Southern Border, with legal challenges to this decision ongoing through to the end of February.

Positive headlines on the trade front helped to spur markets upwards over the month. Whilst the specifics of a trade deal with China have not been forthcoming, President Trump, Robert Lighthizer (United States Trade Representative) and Larry Kudlow (Director of the National Economic Council) all expressed optimism over the month that negotiations were progressing well. Their statements indicated some progress on key issues including currency stability, Chinese structural reforms and subsidies to state-owned enterprises.

US President Donald Trump held a second summit with North Korean dictator Kim Jong-Un in late-February to discuss sanctions and potentially denuclearisation. The summit broke down quickly, with different accounts emanating from both sides of the deal that was on the table.

In the United Kingdom, Brexit remains  a major headache for policymakers. Europe continues to hold firm on its commitment to the originally negotiated withdrawal agreement, including the major sticking point around the Irish border. Whilst Prime Minister May indicated late in the month that she hopes to show significant progress on this point, the domestic politics remain very fluid. Opposition leader Jeremy Corbyn announced at the end of the month he would back growing calls for public vote on Brexit, seemingly increasing the likelihood of a second referendum.

Tensions around the ‘Line of Control’ between India and its North-Western neighbour Pakistan escalated in February, with both sides carrying out airstrikes in opposition territory following a terrorist attack on Indian troops. Whilst the region has been a flashpoint for more than 50 years, this is the first time since 1971 that both sides have conducted military operations on opposite sides of the border.

Equities

Equity markets continued their strong run in February. The Australian market was the best performer over the month, delivering 6% in total return terms, whilst international developed market equities returned 3.5% on a local currency basis. Emerging markets underperformed developed markets over the month, posting a more modest return of 1% in local currency terms.

The highest returning sector in Australia was Financials, followed by Energy and IT. The worst performing sectors were Health Care and Consumer Staples, the latter of which was the only sector to post a negative return for the month.

From a developed market sectoral perspective IT and Industrials were the best performing sectors, whilst the largest detractors in local currency terms were Communication Services and Consumer Discretionary.

Bonds

Bond yields increased in all major fixed income markets outside of Australia for two-year and ten-year durations, with the exception of Japan which remains under yield curve control. Towards the end of the month Jerome Powell, US Federal Reserve Chairman, noted that the economy was facing crosscurrent and conflicting signals and reiterated the Fed’s cautious approach which helped to keep yields well anchored.

Australia was the stand-out in the fixed interest world in February, with yields decreasing on two-year and ten-year government bonds by 10 and 14 basis points respectively. The Reserve Bank of Australia indicated that they viewed the risks to the economy as more balanced than their previous tightening bias would imply, which helped drive bond yields lower. Falling bond yields are positive for bond investment returns.

Currencies

The Australian Dollar fell in value against all major currencies on the back of lower domestic interest rates compared to global peers. The AUD fell by 2.5% against the US Dollar, whilst the biggest fall was 3.5%, against the British Pound. The currency held up best against the Japanese Yen, falling just 0.2% over the month.

The Australian Dollar finished the month at 0.7094 US Dollars, falling 1.8 cents during February.

Commodities

The oil price also continued its recovery in February, with WTI and Brent crude gaining 6.5% on the back of expected production cuts from The Organization of the Petroleum Exporting Countries (OPEC) and political turmoil in Venezuela dampening the outlook for supply.

Industrial metals rose 2.9% on average with copper the stand-out performer as prices rose 5.5% over the month. Precious metals fared less well given the strong risk-on sentiment in February, with gold and silver prices falling by 0.6% and 2.8% respectively.

Performance of key markets:

Asset class	Index	Month (% change)	FYTD (% change)	1 year (% change)
Australian Shares	S&P/ASX 200 Acc. Index	6.0	2.6	7.1
International Shares	MSCI World Ex Aust Unhedged A$ Net Return	5.6	4.9	10.1
International Shares	MSCI World Ex Aust Hedged A$ Net Return	3.4	1.1	2.4
US Shares	S&P 500 Index	3.2	3.8	4.7
UK Shares	FTSE 100 Index	2.3	-4.9	2.1
Japan Shares	Nikkei 225 Index	3.0	-3.1	-1.1
Australian Property	S&P/ASX 200 A-REIT Index	1.8	7.9	18.9
Australian Fixed Interest	Bloomberg AusBond Composite Index	0.9	4.4	6.2
Australian Cash	Bloomberg AusBond Bank Bill Index	0.2	1.4	2.0
Currency	AUD/USD	-2.5	-4.2	-8.6

Returns are for periods to 28 February 2019. Past performance is not an indication of future performance.

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