After a difficult end to 2018, markets hit the ground running in the new calendar year, rebounding strongly throughout January. The Australian share market rose almost 4% over the month, the Australian Dollar strengthened against all major currencies, and credit spreads fell.

Improving rhetoric on the trade front between the US and China helped spur markets higher, with both President Trump and Commerce Secretary Wilbur Ross signaling positive developments early in the month. Meanwhile, China’s commitments to import more US agricultural products and the passing of a foreign investment bill were seen as indications that a deal could be reached, although clear resolution on more difficult issues such as intellectual property theft remains elusive.

Central bankers’ actions were also received positively by markets in January with Jerome Powell, Chair of the US Federal Reserve, indicating that the monetary policymakers were taking a “patient and flexible approach”, removing all reference to gradual rate hikes in their statement released at the end of January. Similarly, the President of the European Central Bank, Mario Draghi, highlighted the need to maintain continued easy policy in Europe.

The US government shutdown continued for much of January as President Trump and House Democrats found it difficult to reach agreement on a bill given their different views on the efficacy of a wall at the Mexican border. After some Federal workers were left without pay for the 35 day shutdown, a temporary cease-fire was reached late in the month that reopened the shuttered government departments for 21 days whilst negotiations continue.

The political situation surrounding the United Kingdom’s proposed exit from the European Union remains extremely fluid. Theresa May’s latest Brexit bill was overwhelmingly voted down in the worst defeat for a sitting government since 1924, sending negotiators back to the drawing board. Whilst the Prime Minister survived a subsequent no-confidence vote, consensus on Brexit appears no closer as bills to delay Brexit or hold a second referendum led by opposition leader Jeremy Corbyn were also defeated. Meanwhile, the EU has continued to maintain it will not reopen the agreement as the March 29 deadline for Britain’s departure inches ever nearer.

Equities

Equity market performance was very strong in January, rebounding from an exceptionally weak quarter at the end of 2018. The US market was the strongest performer, up 8% in local currency terms, whilst the Australian market posted a respectable 4%. Emerging markets underperformed the US over the month with a return of 7%, but outperformed all other major developed markets.

The best performing sector in Australia was Energy, followed by IT and Telecommunications, whilst Financials lagged the market in the lead-up to the release of the Banking Royal Commission’s final report.

From a developed market sectorial perspective Energy and Industrials were the best performing sectors, whilst the largest detractors were Consumer Staples, Energy and Health Care in local currency terms.

Bonds

Bond yields fell on the back of softening rhetoric from monetary policymakers, although performance by jurisdiction was mixed. Two and ten-year government bond yields fell in the US, particularly late in the month following Powell’s comments.

Australian yields experienced sharper declines as the market continues to price in easier policy from the Reserve Bank of Australia on domestic economic concerns, with the two and ten-year yields both falling by more than US yields. Falling bond yields are positive for bond investment returns.

Currencies

Despite falling yields the Australian Dollar had a good month on the back of strong risk sentiment and a rising iron ore price, finishing the month up over 3% against the US Dollar and Euro and only falling against the Canadian Dollar, a fellow developed world commodity currency.

The Australian Dollar finished the month at 0.7273 US Dollars, rising 2.2 cents during January.

Commodities

The big mover in January was crude oil, with speculation of substantial production cuts spurring the commodity up over 18% (for WTI Crude). US sanctions on Venezuela and statements from the Saudi Arabian Energy Minister indicating that The Organization of the Petroleum Exporting Countries (OPEC) would do whatever it takes to rebalance markets were major positives for the crude oil price.

Among industrial metals the standout performer was the iron ore price which rose over 12%, after a supply disruption at one of the world’s largest producers put a major dent in global supply. Despite investors willing to take on increased risk, traditionally defensive commodities such as gold and silver, unexpectedly rose by 3% and 4% respectively over the month.

Performance of key markets 

Asset class	Index	Month (% change)	FYTD (% change)	1 year (% change)
Australian Shares	S&P/ASX 200 Acc. Index	3.9	-3.2	1.4
International Shares	MSCI World Ex Aust Unhedged A$ Net Return	4.1	-0.7	3.8
International Shares	MSCI World Ex Aust Hedged A$ Net Return	7.1	-2.3	-4.7
US Shares	S&P 500 Index	8.0	0.6	-2.3
UK Shares	FTSE 100 Index	3.6	-7.0	-3.5
Japan Shares	Nikkei 225 Index	3.8	-5.9	-8.2
Australian Property	S&P/ASX 200 A-REIT Index	6.2	6.1	13.0
Australian Fixed Interest	Bloomberg AusBond Composite Index	0.6	3.5	5.5
Australian Cash	Bloomberg AusBond Bank Bill Index	0.2	1.2	1.9
Currency	AUD/USD	3.2	-1.8	-9.7

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

Investment returns

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