Global equity markets posted strong returns in June 2019, to finish the financial year on a high note. The US share market increased by 7.0% and the European market increased by 6.0%. The Australian share market, whilst still performing well, rose by a comparatively lower amount of 3.7% over the month. The value of the Australian Dollar increased against most major currencies, and investment grade credit spreads broadly contracted (i.e. the cost of borrowing reduced for high quality companies).

On the 4th of June the Reserve Bank of Australia (RBA) made its first cash rate move since 2016, reducing the cash rate by 0.25% to 1.25%. The market expects further rate cuts, with the Governor of the RBA, Philip Lowe, stating “it is not unreasonable to expect a lower cash rate” by the end of this calendar year. A second reduction of 0.25% was subsequently made on 2 July 2019.

In the wake of Theresa May stepping down as Prime Minister of the United Kingdom the Conservative Party is undertaking a process to select a new leader. The two candidates remaining, Boris Johnson and Jeremy Hunt, will tour the United Kingdom over the next couple of weeks and the 160,000 Conservative Party members will vote for their preferred candidate, with results to be announced on the 23rd of July. Boris Johnson is the strong favourite and has signaled that he will pull the U.K. out of the European Union by the 31 October deadline regardless of whether or not a deal with the European Union is reached.

The United States imposed further economic sanctions against Iran after two US oil tankers were attacked and an armed drone was shot down with the blame falling on Iran. Tensions continue to rise since the US pulled out of the Iran nuclear deal last year. Other foreign relations continue to weigh on the US as the trade war with China saw no progress during June. Earlier in the month President Trump identified himself as the primary obstacle to reaching a deal, hoping to continue negotiations on the initial deal that was close to being finalised. President Trump will meet with President Xi at the G20 summit in early July to continue discussions towards a solution and has threatened to add tariffs on another $325bn of Chinese imports if a deal isn’t reached.

Equities

Equity markets boasted impressive returns to finish the financial year. Developed markets returned 5.9% in local currency terms, with all major equity markets rising at least 3.5%. Emerging markets underperformed developed markets over the month by 1.3% whilst the Australian stock market posted a result of 3.7% during June.

The highest returning sector in Australia was Materials, followed by Industrials and Health Care. The worst performing sectors were Information Technology and Consumer Discretionary, with the latter being the only sector to post a negative return for the month.

From a developed market sectoral perspective all sectors produced positive returns in excess of 3% for the month. Materials and Information Technology were the best performing sectors returning above 9% and 8% respectively, whilst Communication Services, Consumer Staples and Utilities were the worst performing sectors.

Bonds

The Reserve Bank of Australia cut the cash rate by 0.25% on the 4th of June, which is the first rate cut since 2016. The accompanying media release stated, “The outlook for the global economy remains reasonable, although the downside risks stemming from the trade disputes have increased.”

At month-end, the two-year Australian government bond yield had fallen by 0.14% whilst the ten-year yield fell by the same amount. Falling bond yields are positive for short term bond investment returns.

Overseas, yields fell over ten-year terms in all major developed economic regions. The US government two-year bond yield decreased further than its corresponding ten-year term, whilst Chinese and United Kingdom two-year yields increased slightly.

Currencies

The Australian dollar rebounded against the Japanese Yen, Chinese Renminbi and British Pound, and strengthened once again against the USD, spurred on by renewed global risk sentiment and a surging iron ore price. However, the AUD did experience falls against the Euro and Swiss Franc during June.

The Australian Dollar finished the month at 0.7020 US Dollars, increasing by approximately 0.8 US cents over the month.

Commodities

WTI crude oil increased 9.3% during June as tensions with Iran boiled to the surface, greatly increasing the chance of a military confrontation in the region.

Industrial metals rose 1.9% on average, with iron ore the standout performer rising 13.2% following strong Chinese demand and Rio Tinto cutting its full-year output target. Precious metals gained in value with gold rising 8.0% and silver 4.9% in value for the month.

Performance of key markets: