A strong month globally...
Most equity markets posted strong gains in July. Emerging markets were especially strong, and in the U.S. all the major indexes hit record highs. U.S. companies in the main delivered strong corporate profit numbers for the quarter ended 30 June, at both the earnings and revenue levels.
The Mining sub-sector was by far the best performing sector globally, driven by a rally in commodity prices. Other positive news included Greece returning to the bond markets for the first time since 2014, selling 3 billion euros of new five-year bonds at a yield of 4.625%.
... Though Australian equities held back by strong currency
The S&P/ASX200 index was flat for the month, underperforming other markets. The market found itself in the unusual position of struggling despite a strong performance from both the Mining and Bank sub-sectors. The Australian dollar rose strongly in value against the U.S. dollar, and this had a negative impact on export-oriented companies.
On 19 July the bank supervisor the Australian Prudential Regulation Authority (APRA) released its much-anticipated capital requirements, saying that Australian banks would need to be considered "unquestionably strong". The announcement was received well by investors, who appeared to consider the requirements to be less onerous than initially feared, as well as for bringing clarity to the issue. The S&P/ASX200 Bank sector rallied 3.3% on the day of the announcement.
Aside from Mining and Banks, another strong sector was Discretionary Retail, redressing some of the losses from the previous month.
The weakness came from heavy underperformance in the rest of the market – specifically from industrial stocks with large overseas exposures, which fell victim to the sharp rise in the Australian dollar. Health Care, the industry sector with the most offshore exposure, was the worst performing sector.
Bond yields little changed
Bond yields were relatively stable. The U.S. 10-year Treasury yields was little changed, Euro zone 10-year yields rose modestly (likely on strong Euro zone economic data) and Japanese 10-year government yields fell slightly (likely on the Bank of Japan once again pushing out its 2% inflation forecast). Australian 10-year government bond yields rose eight basis points over the month.
Aussie dollar surges
The big currency story of the month was the weakening U.S. Dollar, which was weighed down by Federal Reserve Chair Janet Yellen's "dovishness" on the rates outlook, as well as a soft CPI reading. The Australian Dollar rose against most major currencies, particularly against the U.S. Dollar, against which it hit US$0.80.
In testimony before the U.S. Congress on 12 July, Dr Yellen suggested U.S. interest rate increases would be more gradual than previously anticipated. The reaction to the comments was a rise in equities and a fall in the U.S. Dollar. A weak U.S. CPI also added to doubts about the path of future rate hikes in the U.S. and so added to pressure on the U.S. Dollar.
On 18 July, the Reserve Bank of Australia (RBA) published the minutes of its July monetary policy meeting, which contained a discussion of a "neutral nominal cash rate of around 3½ percent", which would be 2% above the current official cash rate. This prompted the market to interpret this as the RBA adopting a more "hawkish" stance on monetary policy, or more likely to raise rates sooner rather than later.
Strength in the Australian currency appeared to be a combination of domestic currency strength, driven by the rates outlook and rising commodity prices, particularly iron ore and coal, compounded by U.S. Dollar weakness.
Iron ore rallies
Major commodity prices generally rallied during the month, driven likely in part by a weakening U.S. Dollar and strengthening Chinese economic data. The iron ore price was a standout, rising 15% over the month.
(S&P/ASX 200 Acc Index)
(MSCI World Ex Aust
Unhedged A$Net Return)
(MSCI World Ex Aust
Hedged A$ NetTotal Return)
(S&P 500 Index)
(FTSE 100 Index)
(Nikkei 225 Index)
|Australian Fixed Interest
Bank Bill Index)