Equity markets’ returns were mixed in February as China’s reopening was offset by additional future expected Central Bank interest rate hikes in response to resilient labour markets. The value of the Australian Dollar decreased against all major foreign currencies, increasing overseas investment returns when measured in Australian dollar terms. International and Australian fixed interest markets posted negative returns as bond yields generally increased.

The Board of the Reserve Bank of Australia (RBA) met on 7 February to discuss global and domestic economies and markets, and to review their monetary policy. The Board noted “that inflation was likely to have reached its peak in the December quarter, but this could only be confirmed in a few months’ time”. Although a 50-basis point (0.5%) increase was considered, the Board decided to increase the target cash rate 25 basis points from 3.1% to 3.35%. Of note the RBA Board also discussed the implications of enacting a central bank digital currency (“CBDC”). Whilst some positive cases were put forward the minutes stated, “the staff’s view is that there is not yet a clear public policy case to issue a retail CBDC, but such a case could emerge”.

The Russia-Ukraine war marked its one-year anniversary on 24 February. Little tangible military progress has been made on either side for some time. However, the damage continues to rise. Upper estimates suggest 300,000 casualties have occurred over the past year on both sides (including military personnel and civilians). At its peak Russia controlled approximately 130,000 square kilometers of Ukrainian territory, mostly in the South and East of Ukraine. Ukraine, however, has fought back and reclaimed around 30,000 square kilometers. The damage to Ukraine’s economy has been severe with an estimated 35% drop in GDP. The resulting humanitarian crisis has seen approximately eight million refugees spread across Europe, with five million citizens displaced within Ukraine itself. The pathway to de-escalation or a peace agreement appears a long way off with President Zelensky pledging that 2023 will be “the year of our victory”. President Putin escalated global tensions further when he suspended participation in the New Start Nuclear Weapons Treaty in late February.

The Japanese Government nominated Kazuo Ueda to be the next Governor of the Bank of Japan on 14 February. During parliamentary hearings Ueda said, “in order for policy to be revised, I think there needs to be a major improvement in the price trend”, whereby market commentators inferred he’s likely to continue with the policy from his predecessor for some time. The five-year term for Ueda will commence in April if he is approved by the parliament, which is likely as Prime Minister Kishida’s Government controls both chambers.

On 27 February the European Union and the United Kingdom agreed to the Windsor Framework as an enhancement to post-Brexit friction between Northern Ireland and the Republic of Ireland. Northern Ireland (a member of the UK but not the EU) shares a land border with the Republic of Ireland. The current solution, the Northern Ireland Protocol, requires customs checks to be carried out at ports in Northern Ireland. The Windsor Framework, which still needs ratification by the UK parliament, looks to create a green lane for goods remaining within Northern Ireland (and therefore do not require checks) and a red lane for goods transiting to the EU with the standard checks and quarantine measures in place.

Equities

Major developed foreign equity markets produced mixed returns in February. Developed markets (excluding Australia) returned -1.6% on a currency-hedged basis (and 2.1% in Australian dollar terms, reflecting the fall in the value of the Australian dollar). The best performing of the major foreign markets was the European’s stock market (Euro Stoxx 50 Index) returning 1.9%.

The Australian stock market (S&P/ASX 200 Index) generated a return of -2.4% during February, with 4 out of 11 industry sectors experiencing positive returns. Utilities and Information Technology were the best performing sectors returning 2.3% and 2.2% respectively. Materials and Financials were the standout negative performing sectors returning -6.9% and -3.8% respectively.

From a foreign developed market perspective, only 2 out of 11 sectors produced positive returns. Industrials and Information Technology produced returns of 0.4% and 0.3% respectively, whilst Energy, Materials, Utilities and Communication Services were the worst performing sectors, each returning between -3.9% and -3.5%.

Bonds

The Australian government bond yield curve shifted upwards in February, resulting in Australian fixed interest returns for the month of -1.3% (Bloomberg AusBond Composite Index). The slope of the Australian government bond yield curve bear flattened in February as the two-year yield increased by 0.47% and the ten-year yield increased by 0.30%.

Over February, major developed global government bond yields broadly increased, resulting in negative returns, with the Bloomberg Barclays Global Aggregate Index (Hedged) returning -1.3%. Notably, the United States Government yields increased 0.61% over two-year maturities, the most of the major foreign developed government bond markets. Over the ten-year term, United Kingdom Government yields also rose the most, by 0.49%, as inflation remains elevated in that region.

Currencies

The Australian Dollar fell against all major foreign currencies in February. The Australian Dollar decreased 4.6% against the United States Dollar and 2.3% against the British Pound. The Australian Dollar finished the month at 0.6729 US Dollars, down 3.3 US cents over the month.

Commodities

Commodity prices continued to be volatile over February. The S&P GSCI Commodities index ended the month down 4.0%, with the index swinging down over 5% and then up 4% and then down again during the month. Notably industrial metals was the worst performing commodity sector with the London Metals Exchange Index falling 7.5%. The price of WTI oil and Brent oil finished down 2.3% and 0.7% respectively. Of the precious metals, the price of gold decreased 5.3% and the price of silver decreased by 11.9% in February.

Performance of key markets over relevant time periods to 28 February 2023: 

*Percentage changes in returns are for periods over the month of February (Month), financial year to date 30 June 2022 to 28 February 2023 and the prior 12 months 28 February 2022 to 28 February 2023 (Prior 12m). Past performance is not an indication of future performance.

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