The global risk asset sell-off continued in December, as equity markets and the Australian Dollar fell, credit spreads rose and safe-haven assets such as government bonds and precious metals rallied.

Trade concerns flared back up early in the month, with news that US officials were preparing to declare tariffs on the remainder of Chinese imports if January’s truce talks fail. This was compounded by the arrest of Huawei’s Chief Financial Officer, the daughter of the company’s founder, by Canadian authorities on US criminal charges for alleged breaches of sanctions on Iran. Fears of further escalation between the two countries weighed heavily on risk sentiment.

Concerns of a US Government shutdown were also a headwind to markets over the month. President Trump and the Democrats, who won control of the House of Representatives effective from early 2019 in the November midterm elections, disagree over the best use of government spending on border control and funding for a wall between the US and Mexico. These fears were realised just before Christmas when a partial shutdown ensued as mutually agreeable terms could not be reached between the two parties.

Meanwhile, the chaos caused by Brexit negotiations in the UK continued, as Prime Minister Theresa May’s draft deal stalled and was eventually pulled in advance of a planned Parliamentary vote, a major blow to cabinet’s attempt to reach an agreement. Following this setback, Conservative MPs held a confidence vote in May’s leadership which she comfortably survived. Whilst the Brexit negotiations remain in the balance, May’s position as Prime Minister is now safe for at least the next 12 months.

In monetary policy news, the December US Federal Reserve meeting resulted in a much anticipated further hike to interest rates, the fourth of 2018. Whilst comments in Chair Jerome Powell’s conference implied fewer future hikes than previously flagged, the market’s reaction was negative as hopes were dashed that recent market weakness and trade concerns would cause a more pronounced slowdown in the pace of monetary tightening.

Equities

Equity market performance was deeply negative in December, with global developed markets falling 8% in local currency terms. The Japanese and US markets were the worst performers, down 10% and 9% respectively, whilst Australia fared comparatively well as it was close to flat for the month in total return terms. Emerging markets outperformed developed markets by 5% in December.

In the Australian market sectoral performance was mixed, with the Telecommunications and IT sectors the biggest losers whilst Materials, Health Care and Utilities outperformed.

From a developed market sectoral perspective Materials and Utilities were the best performing sectors, whilst the largest detractors were Energy, Industrials and Financials in local currency terms.

Bonds

The steep decline in risk sentiment over the month led to a rally in bonds as yields fell in most jurisdictions. Two and ten-year government bond yields in the US fell despite the Federal Reserve delivering its fourth interest rate hike of 2018, both falling roughly 30 basis points.

Ten year yields in Australia fell by around the same amount, although the movement in the two-year yield was much more muted. Yields also fell in Japan, Europe and the United Kingdom, but to a lesser degree. As a reminder, falling bond yields are positive for bond prices.

Currencies

The Australian Dollar was hit hard in December, given its position as a relatively risk-on currency compared to major developed market peers.

The AUD fell against all major currency pairs, including roughly 3.5% against the US Dollar and almost 7% against the Japanese Yen. The Japanese Yen was the strongest currency over the month given its tendency to rally in times of geopolitical and market stress.

The Australian Dollar finished the month at 0.7049 US Dollars, having fallen 2.6 cents during December.

Commodities

The oil price continued its recent slide in December, falling by another 8% for Brent Crude and 11% for WTI. Despite some agreement from OPEC on supply cuts early in the month, investors’ steadily weakening outlook for demand and mounting evidence of rising inventories led to the price weakness.

Precious metals performed well over the month against the backdrop of falling equity prices, with silver and gold up 9% and 5% respectively. Industrial metals performance was more mixed, with iron ore the best performer whilst aluminium and copper both fell.

Performance of key markets 

Asset class	Index	Month (% change)	FYTD (% change)	1 year (% change)
Australian Shares	S&P/ASX 200 Acc. Index	-0.1	-6.8	-2.8
International Shares	MSCI World Ex Aust Unhedged A$ Net Return	-4.3	-4.6	1.5
International Shares	MSCI World Ex Aust Hedged A$ Net Return	-8.3	-8.8	-7.6
US Shares	S&P 500 Index	-9.0	-6.9	-4.4
UK Shares	FTSE 100 Index	-3.5	-10.2	-8.7
Japan Shares	Nikkei 225 Index	-10.3	-9.4	-10.3
Australian Property	S&P/ASX 200 A-REIT Index	1.7	-0.1	2.9
Australian Fixed Interest	Bloomberg AusBond Composite Index	1.5	2.8	4.5
Australian Cash	Bloomberg AusBond Bank Bill Index	0.2	1.0	1.9
Currency	AUD/USD	-3.5	-4.8	-9.7

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

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