Risk assets experience significant weakness

October was a challenging month for global investors, as growth assets around the world experienced significant weakness. Depending upon the jurisdiction, equity markets fell between 5% and 10% in local currency terms over the month, on the back of rising interest rates and the ongoing US-China trade conflict, whilst credit spreads rose and the Australian Dollar fell against global peers.

Broad-based profitability concerns helped to fuel the market’s downward movement, as investors reviewed their expectations for the impact of rising interest rates on corporate funding costs, tightening labour markets on wages, and the trade conflict on input prices and global demand.

The ongoing trade tensions caused the Chinese leadership to take further steps to shore-up the domestic economy, shortlisting institutions to face additional capital requirements, enacting further cuts to banks’ required reserve ratios and initiating a coordinated effort to show unwavering support for the private sector.

Meanwhile, in European news, budget discussions between Italy’s newly-installed populist coalition government and the EU Commission continue after the government’s proposal was rejected for being insufficient to reduce the country’s elevated debt levels. The British government under Theresa May continues to limp towards a settlement over the UK’s from the European Union, with expectations emerging that a deal could be reached as early as 21 November.

In the Middle East, the Trump administration faced a major test of its strategic regional partnership with Saudi Arabia after what appears to have been the premeditated murder of a Turkish journalist, Jamal Khashoggi, in a Saudi consulate in Istanbul. Whilst details continue to emerge around the incident, the US response has yet to evolve into any meaningful action given the importance of the relationship both in terms of regional stability and arms sales.

Equities

Equity market performance was very poor in October, with all the major indices experiencing negative returns. In local currency terms, developed markets were down 7% whilst emerging markets fell almost 8% over the month.

The Australian market was one of the better performers, although this is little consolation with the ASX 200 Accumulation Index down 6%. The best performers were the UK and European markets, although both still experienced sharply negative returns, whilst the Hong Kong and Japanese markets recorded the largest declines.

From a developed market sectoral perspective Utilities and Consumer Staples were the stand-out performers, with Utilities being the only sector to escape a negative return over the month. The largest detractors were Industrials and Energy, closely followed by Consumer Discretionary, IT and Materials.

No sector in the Australian share market managed to deliver a positive return, with Real Estate and Utilities the best performers and IT and Energy the largest detractors.

Bonds

October was a mixed month for bond yields. US yields increased initially on the back of expectations of future interest rate hikes from the US Federal Reserve, but then gave way to a fall in yields as the demand for safe-haven assets drove US bond prices higher.

Moves in 10-year bonds were larger than shorter-dated instruments as the US 10-year bond yield reached an intraday high of 3.24% earlier in the month, its highest level since 2011. Other jurisdictions initially followed, before yields fell back as the equity market weakness continued to broaden out.

Currencies

The month saw falls in the Australian Dollar against most major currency pairs, with the exceptions of the Euro and the Swiss Franc which were broadly flat.

Given the prevailing risk-off environment, comparative safe-haven currencies such as the US Dollar and Japanese Yen performed particularly well, up 2% and 2.5% against the AUD respectively.

The Australian Dollar finished the month at 0.7073 US Dollars, falling 1.5 cents over the month.

Commodities

After hovering near its four-year high, oil retreated over the month despite interruptions to supply in Venezuela, Iran and the hurricane-affected areas of the Gulf of Mexico. Price falls accelerated in the latter half of the month after Saudi Arabia announced it could provide more crude oil quickly if required to plug supply gaps.

Precious metal performance was mixed, with silver falling over 2% and gold up almost as much in US Dollar terms. Most industrial metals fell over the month, with the notable exceptions of coal and iron ore which rose substantially.

Performance of key markets 

Asset class	Index	Month (% change)	FYTD (% change)	1 year (% change)
Australian Shares	S&P/ASX 200 Acc. Index	-6.1	-4.6	2.9
International Shares	MSCI World Ex Aust Unhedged A$ Net Return	-5.4	1.6	9.6
International Shares	MSCI World Ex Aust Hedged A$ Net Return	-6.9	-1.7	2.4
US Shares	S&P 500 Index	-6.8	0.3	7.3
UK Shares	FTSE 100 Index	-4.9	-5.5	-0.9
Japan Shares	Nikkei 225 Index	-9.0	-0.9	1.6
Australian Property	S&P/ASX 200 A-REIT Index	-3.1	-1.3	7.3
Australian Fixed Interest	Bloomberg AusBond Composite Index	0.5	1.0	3.1
Australian Cash	Bloomberg AusBond Bank Bill Index	0.2	0.7	1.9
Currency	AUD/USD	-2.1	-4.5	-7.6

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

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