US trade and foreign policy continues to result in regional performance differentials.

The primary financial market news item over the month was the Turkish Lira’s rapid descent and subsequent fears of contagion to other developing countries. The Turkish economy found itself over-extended as result of excessive government spending and borrowing. These financial difficulties were exacerbated by American tariffs, levelled after the imprisonment by Turkey of an American pastor, which saw the lira fall over 30% against the US Dollar despite attempts by the Turkish Government and Central Bank to stabilise the currency.

Meanwhile, the Trump Administration announced additional sanctions against Russia after arriving at a final determination that Putin’s Government was responsible for the nerve agent attack on former double-agent Sergei Skripal and his daughter on British soil, causing the Russian Ruble to fall back to lows not seen since early-2016.

August also saw a number of escalations between the US and China on the trade front, with additional tariffs of 25% levied on USD $16bn on each other. Donald Trump, as well as threatening tariffs on USD $200bn of goods in further escalations, again criticised China for perceived currency manipulation.

In positive news for global trade, Presidents Trump and Mexico’s Enrique Peña Nieto agreed on a trade deal between the two countries, removing a key source of uncertainty for the Mexican economy. Negotiations with Canada, another long-term ally of the United States, remain ongoing on the revamped NAFTA agreement.

Equities

Despite negative headlines on trade and emerging market weakness, developed market equities performed well over the month, albeit with large regional differences. The US was the stand-out performer, as the market responded positively to the strength in the domestic economy and upside surprises to corporate earnings reports.

The Australian and Japanese markets also experienced positive returns whilst Europe sold-off due to its linkages to emerging markets, most notably Turkey. Emerging markets had another difficult month compared to developed markets given the stress in Turkey and Argentina and fears of contagion to other markets.

Performance was also mixed on a sectoral basis, with IT, Health Care and Consumer Discretionary outperforming on a developed markets sectoral basis in local currency terms, whilst Energy and Materials underperformed.

In Australia the strongest performing sectors were IT, Telecommunications and Healthcare, whilst Energy and Materials were the weakest.

Bonds

Global bond yields were broadly lower over the month as trade and emerging market concerns weighed on risk appetite. Japan and the UK were the only major markets in which ten-year yields rose over the month, whilst yields in Australia, Europe and the US all fell.

Federal Reserve Chair Jerome Powell’s speech at the annual Jackson Hole symposium reinforced the need for additional rate rises but at the same time acknowledged the many uncertainties in setting monetary policy and advocated a gradual, flexible approach. The yield curve continued to flatten in the aftermath of the Jackson Hole symposium, with the gap between two and ten-year yields in the US falling below 0.20% for the first time in over a decade. A flattening yield curve has generally been a good predictor of a potential slow-down in economic growth.

Currencies

August was a difficult month for the Australian Dollar, which fell against most global developed peers, as the interest rate differential which has historically underpinned the attractiveness of the currency to global investors continues to be eroded.

The weakness against global currencies was broad-based, but falls were largest against safe-haven currencies such as the Swiss Franc and Japanese Yen. The Australian Dollar held up best against the British Pound and Euro which are also heavily exposed to global trade dynamics. The Aussie fell 2.35 US cents against the US Dollar over the month, finishing at 0.7189.

Commodities

In the first half of the month the oil price continued its falls from July, as unexpectedly high inventories and weakness in emerging markets pointed towards falling global demand for the commodity. Prices subsequently recovered and ended the month up overall, amidst expectations of tightening supply from major producers.

Industrial metal prices were down over the month in aggregate although iron ore and coal, Australia’s two largest mineral exports, finished the month in positive territory. Precious metals performed poorly, with both gold and silver experiencing price declines.

Performance of key markets 

Asset class	Index	Month (% change)	FYTD (% change)	1 year (% change)
Australian Shares	S&P/ASX 200 Acc. Index	1.4	2.8	15.4
International Shares	MSCI World Ex Aust Unhedged A$ Net Return	4.1	6.8	24.3
International Shares	MSCI World Ex Aust Hedged A$ Net Return	1.5	4.7	14.7
US Shares	S&P 500 Index	3.3	7.1	19.7
UK Shares	FTSE 100 Index	-3.3	-1.8	4.1
Japan Shares	Nikkei 225 Index	1.4	2.6	18.6
Australian Property	S&P/ASX 200 A-REIT Index	2.7	3.7	15.8
Australian Fixed Interest	Bloomberg AusBond Composite Index	0.8	1.0	3.8
Australian Cash	Bloomberg AusBond Bank Bill Index	0.2	0.4	1.9
Currency	AUD/USD	-3.2	-2.9	-9.5

Returns are for periods to 31 August 2018. Past performance is not an indication of future performance.

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