Market Update September 2019
October 7, 2019
Equities performed strongly in September 2019
Global equity markets posted positive returns in September 2019. All major stock exchanges recorded gains over the month by at least 1%, with the Japanese and European stock markets registering the largest gains of 5.8% and 4.3% respectively. The value of the Australian Dollar increased against most major currencies, and global investment grade credit spreads broadly contracted (i.e. the market’s perceived riskiness of lending to high quality companies decreased).
The on-going trade war between US and China saw no major advancement towards a resolution in September. Analysis from the Federal Reserve suggested the current tariffs may reduce economic output in the US by 1% in 2020. Economic data showed China’s exports contracting, with sales to the US falling 16% due to the effect of the current tariffs in place.
On the political front, a whistleblower reported that President Trump asked the Ukrainian president, Volodymyr Zelensky, to provide information on democratic presidential candidate Joe Biden and his son Hunter Biden. The transcript of the phone call and testimony of senior members involved have been released. The whistleblower alleges that President Trump was planning to withhold $400m in foreign aid to the Ukraine unless the president of Ukraine cooperated. Upon receiving the news, the Speaker of the House, Nancy Pelosi, announced an official congressional investigation and impeachment proceedings.
For President Trump to be removed from office:
• Congressional findings must support impeachment,
• the House must vote to impeach (requiring a simple majority to pass), and
• the Senate must support (requiring a two-thirds supermajority to pass).
Given the current constituency of the Senate, where the Republicans hold a majority, this final step seems very unlikely.
Brexit saw a number of surprise twists in the month of September. Boris Johnson, having surrendered his majority (that utilised an alliance with the Democratic Unionist Party), hasn’t been able to pass a single motion to date. Early in the month parliament passed the Benn bill, that is seen by lawyers as water tight, which forces the Prime Minister to seek an extension until the end of January 2020 if a deal (or no-deal) isn’t approved by parliament by 19 October.
Parliament was shut down under the order of the Queen based on the advice of Boris Johnson for a period of 5 weeks beginning 9 September. The prorogation, deemed by many as extraordinary, went all the way up to the Supreme Court. In a unanimous decision (11-0), the Supreme Court justices found that the prorogation was unlawful and therefore null and void.
Critically the judgement did not include any reference to Brexit or the manner the UK may or may not leave the EU, stating "the decision to advise Her Majesty to prorogue Parliament was unlawful because it had the effect of frustrating or preventing the ability of Parliament to carry out its constitutional functions without reasonable justification". The Speaker of the House, John Bercow, recalled parliament the following day. Whilst Boris Johnson strongly disagreed with the court’s ruling, he confirmed he would not step down as Prime Minister despite many calling for him to do so.
Two Saudi Arabian oil fields were attacked on the 14th of September. The United States, Saudi Arabia, and more recently the United Kingdom, have accused Iran of perpetrating the attacks. Iranian officials have strongly denied the accusations. The attacks impacted approximately 5% of the world’s global oil supply and Saudi Arabian officials suggested it would take “weeks not days” to restore the plants to full production capacity. Remarkably by the end of the month there were no reported casualties from the drone attacks, and production has returned to full capacity.
Please note: commentary is TelstraSuper’s interpretation of how the market has reacted to political events as they have unfolded and is not intended to represent political views.
Equities
Equity markets across the board produced positive returns in September. Developed markets returned 2.3% in local currency terms, whilst emerging markets continued to underperform developed markets returning 1.5%. The leading performer was Japan’s Nikkei 225 which returned 5.8% for the month alone.
The Australian stock market generated a 1.8% return during September. The highest returning sector in Australia was Financials, with Energy and Consumer Discretionary also delivering returns in excess of 2% for the month. The worst performing sectors were Communication Services, Health Care and Real Estate.
From a global developed market sectoral perspective, all sectors generated positive returns. Financials and Energy were the best performing sectors with returns over 4%, whilst Health Care and Communication Services remained relatively flat.
Bonds
Both the two-year and ten-year Australian government bond yields increased, by 0.05% and 0.13% respectively, during September. This is the first occasion since April that either the two- or ten-year bond yields have had a net increase over a full month. Rising bond yields are negative for short term bond investment returns.
Overseas, ten-year yields increased in all major developed economic regions. Yield curves in all major economies, except for Europe, steepened with ten-year bond yields increasing further than their corresponding two-year term yields.
Currencies
The Australian dollar strengthened against the Japanese Yen, Euro and Swiss Franc, due to a bullish economic outlook on Australia from a global perspective. However, the AUD remained broadly flat against the Chinese Renminbi and the US Dollar, whilst the AUD fell against the British Pound.
The Australian Dollar finished the month at 0.6750 US Dollars, which was a slight increase of 0.3% against the USD over the month.
Commodities
The price of WTI crude oil decreased by 1.9% in September whilst Brent crude oil increased 0.6%. Increased volatility in oil prices over the month resulted from drone attacks on Saudi Arabian oil producing plants and uncertainty around how quickly supply could be restored.
Industrial metal prices increased 0.7% on average, with iron ore being the standout performer following increased global demand. Of the precious metals, gold and silver saw negative returns of 3.2% and 7.5% respectively 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 | 1.8 | 2.4 | 12.5 |
| International Shares | MSCI World Ex Aust Unhedged A$ | 2.0 | 4.7 | 9.1 |
| International Shares | MSCI World Ex Aust Hedged A$ | 2.3 | 1.3 | 1.9 |
| US Shares | S&P 500 Index | 1.9 | 1.7 | 4.3 |
| UK Shares | FTSE 100 Index | 3.0 | 1.0 | 3.2 |
| Japanese Shares | Nikkei 225 Index | 5.8 | 3.1 | -7.8 |
| Australian Listed Property | S&P/ASX 200 A-REIT Index | -2.7 | 0.9 | 18.3 |
| Australian Fixed Interest | Bloomberg AusBond Composite Index | -0.5 | 2.0 | 11.1 |
| Australian Cash | Bloomberg AusBond Bank Bill Index | 0.1 | 0.3 | 1.7 |
| Currency | AUD/USD | 0.3 | -3.8 | -6.6 |