Global equity markets were volatile in June, but overall continued to recover from recent lows as markets focused on sustained central bank support and reopening economies. The value of the Australian Dollar increased against all major currencies, somewhat dampening the returns of overseas investments when measured in Australian dollar terms. Global investment grade credit spreads continued to contract over the month (i.e. the market’s perceived riskiness of lending to high quality companies decreased).

The Australian Government moderately boosted their fiscal stimulus program by announcing a new stimulus plan under the JobMaker scheme of $250m directed at the Arts industry. The stimulus comprises a combination of grants and loans targeting specific areas of the arts community to encourage the production of new shows and festivals. The Government also announced the launch of the Cyber Enhanced Situational Awareness and Response (CESAR) program, a $1.35b package over the next 10 years to enhance cyber security capabilities. The Reserve Bank of Australia (RBA) reaffirmed in its June meeting that it will continue to perform yield curve control by targeting a 0.25% yield for Government bonds with durations out to 3 years. The Board of the RBA indicated that it would not increase the cash rate target until progress is made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band [1].

In an unprecedented move the Federal Reserve (Fed, the United States central bank) began purchasing corporate bonds through the secondary market in mid-June (putting into action a program that was announced in March). That is the Fed began to purchase corporate bonds that have already been issued by companies through its Secondary Market Corporate Credit Facility. Typically, the Fed is only allowed to purchase United States Treasuries. However, under its emergency lending powers, the Fed can purchase other financial securities, such as mortgage backed securities, which it did during the 2008/9 Global Financial Crisis (GFC). This move from the Fed goes far beyond what it did during the GFC by purchasing investment grade and also sub-investment grade bonds, and some have questioned the legality of the Fed’s policy in this matter. The Chairman of the Fed, Jerome Powell, stated that the Fed is supporting the financial markets to help usher in a strong and stable recovery and protect American jobs.

Tensions spilled over in the Galwan Valley on the disputed western Chinese-Indian border with conflict erupting over the Line of Actual Control (LAC). Both countries agreed that no military weapons were allowed near the LAC in 1996. However, on the 15th of June troops from both countries fought in hand-to-hand combat resulting in casualties on both sides, the greatest conflict in the region since 1962. In late June, the National People’s Congress in China unanimously passed national security reforms that significantly affect Hong Kong’s ability to self-govern. This law undermines the “one country, two systems” principle enshrined in Hong Kong’s mini-constitution known as the Basic Law. This has potential economic consequences with governments around the world considering their responses (if any) including the recent passage of the Hong Kong Autonomy Act by the US Congress which, once it becomes law (when signed into law by the US President) will impose sanctions against foreign individuals and financial institutions determined to be “involved in the erosion of certain obligations of China with respect to Hong Kong”.

COVID-19

Reported coronavirus case numbers exceeded 10 million on a worldwide basis at the end of June, with a total of over 500,000 fatalities. As countries ease lockdown restrictions to allow economies to reopen there has been a resurgence in cases. Reported daily numbers of infection at the end of June were at record highs in the United States, notably in the southern states. The line between the first wave ending and a second wave beginning is not clear cut as it appears many regions are being exposed to the virus for the first time. 

Emerging economy countries are experiencing significant distress from the coronavirus, with daily reported cases increasing and the actual number of cases likely being underreported. As at the end of June, six of the top ten countries by cases reported were emerging countries, with this projected to rise quickly. Typically, emerging countries lack the fiscal capacity and the technological infrastructure to backstop payrolls and to allow workers to be productive whilst isolating.

Australia saw an uptick in coronavirus cases in June initially due to international travellers returning home, but this has since morphed into cases with unknown local contacts, particularly in Victoria. The Australian Government maintains its policy of letting State Governments manage the coronavirus response. The Victorian Government, reintroduced home restrictions for Metropolitan Melbourne for six weeks from 8 July 2020 [2]. New Zealand announced in June that it was COVID-19 free and that restrictions would be eased except for tight international border controls.

Equities

All major foreign equity markets posted positive returns in local currency terms in June. Developed markets (excluding Australia) returned 2.3% on a currency-hedged basis (and -1.1% in Australian dollar terms), significantly underperforming emerging markets which returned 6.6% in local currency terms. The best international performer was Europe’s EuroStoxx 50 Index which returned 6.4% for the month.

The Australian stock market generated a return of 2.6% during June, with 7 out of 11 sectors contributing positively. Information Technology, Consumer Discretionary and Consumer Staples were the best performing sectors returning 6.0%, 5.4% and 5.1% respectively. Real Estate and Energy decreased the most, by 2.9% and 2.0% respectively.

From a developed market sectoral perspective 8 out of 11 sectors produced positive returns. Information Technology, Consumer Discretionary and Materials were the best performing sectors, returning 7.1%, 4.5% and 3.1% respectively in local currency terms. Health Care, Utilities and Energy were the worst performing sectors, decreasing 1.6%, 1.6 and 1.5% respectively.

Bonds

Australian government bond yields reduced fractionally over June with two-year and ten-year yields decreasing by 0.017% and 0.015% respectively.

Whilst major global government bond yields moved somewhat throughout the month of June the net outcomes for the month were broadly unchanged across the two- and ten-year durations, with the exception of Chinese bonds. The Chinese government bond yield curve flattened substantially with two-year yield rising 0.41% and the ten-year yield increasing 0.16%.

Currencies

The Australian dollar strengthened against all major currencies over the month due to further risk-on sentiment following the opening of developed economies and continued support from central banks. The AUD increased by 3.6%, 3.5% and 3.1% against the Japanese Yen, United States Dollar and British Pound respectively.

The Australian Dollar finished the month at 0.6903 US Dollars, up 2.4 US cents or 3.5% over the month.

Commodities

The price of crude oil rose significantly once again throughout June from depressed levels. WTI rose 10.7% and the price of Brent crude oil increased 16.5% due to continued reduced global output resulting from an OPEC alliance agreement. Industrial metal prices increased 7.7% on average, with copper being the standout performer, increasing 11.9%. In precious metals, the price of gold increased 2.9% and silver returned 1.9% for the month.

Performance of key markets

Asset class	Index	Month (% change)	FYTD (% change)	1 year (% change)
Australian Shares	S&P/ASX 200 Acc. Index	2.6%	-7.7%	-7.7%
International Shares	MSCI World Ex Aust Unhedged A$	-1.1%	5.2%	5.2%
International Shares	MSCI World Ex Aust Hedged A$	2.3%	1.3%	1.3%
US Shares	S&P 500 Index	2.0%	7.5%	7.5%
UK Shares	FTSE 100 Index	1.7%	-13.8%	-13.8%
Japanese Shares	Nikkei 225 Index	2.0%	7.0%	7.0%
Australian Listed Property	S&P/ASX 200 A-REIT Index	-1.4%	-21.3%	-21.3%
Australian Fixed Interest	Bloomberg AusBond Composite Index	0.3%	4.2%	4.2%
Australian Cash	Bloomberg AusBond Bank Bill Index	0.0%	0.8%	0.8%
Currency	AUD/USD	3.5%	-1.7%	-1.7%

Returns are for periods to 30 June 2020. Past performance is not an indication of future performance.

[1] https://www.rba.gov.au/monetary-policy/rba-board-minutes/2020/2020-06-02.html

[2] https://www.vic.gov.au/coronavirus-covid-19-restrictions-victoria