Market Update May 2017

Equities rally around the world to new highs, though Australia is held back mainly by the bank sector.

Strong performance from global equities…

Financial markets embarked on a relief rally early in May after Emmanuel Macron, the centrist and pro-Europe candidate, won the French Presidential election. Exceptionally strong U.S. and European company reporting seasons also underpinned equity market strength.

Most equity markets posted gains during the month. The S&P500 index rose to a record high. Even stronger was the performance of the FTSE100 index, which also posted record highs. The MSCI China index performed strongly though the China Shanghai "A" shares index fell. Among individual sectors, there were sharp gains from Information Technology while the Energy sector lagged behind. Of particular interest was the heavy sell-off in U.S. department stores on fears of a structural shift towards online retailing, highlighted by poor sales results. The sector fell 11% over the month.

…However, Australia underperforms heavily as banks hit

The Australian equity market fared significantly worse than its global peers, weighed down by a large sell-off in bank stocks. The ASX200 Banks index fell 9.8% over the month. The problems for banks began with insipid reported results, accompanied by statements from the banks that indicated a flat outlook. This was followed by talk of a domestic housing bubble and the possibility of a housing bust, which further hurt the sector. The final blow for the sector was the Federal Government's announcement in the 2017-18 Federal Budget of a levy to be imposed on the major banks.

Banks were the worst performing sub-sector during the month. But not far behind was Discretionary Retail, which was hit by several high-profile retailer bankruptcies as well as continued Amazon-related scrutiny. The sector slumped 8.9% over the month. 

Best & worst stock performers

The best performing ASX100 stocks during the month included Qantas Airways (+18.2%), Fairfax Media (+17.5%) and GrainCorp (+15.7%). The worst performers included Vocus Group (-16.3%), CSR (-14.9%) and James Hardie Industries (-13.6%).

Bond yields fall 

Global government bond yields initially rose in the first half of the month then fell in the second half of the month, ultimately finishing the month lower. The U.S. yield curve continued to flatten as the US 3 month T-Bill yield rose to its highest level since October 2008, reflecting expectations of an impending U.S. Federal Reserve rate hike. The U.S. 10 year Treasury yield fell on further unwinding of hopes for economic stimulus from President Trump. 

Adding to the dovishness in longer-dated bonds was the Fed unveiling its plans to unwind its massive balance sheet. During the Global Financial Crisis, the Fed bought trillions of dollars of government bonds in an effort to keep down interest rates. Now, with a $4.5 trillion balance sheet, the central bank said it plans to reduce that stimulus in a “gradual and predictable” manner so as not to rattle the bond market.

Currencies

The Australian Dollar fell only slightly against most major currencies despite heavy falls in iron ore and coal prices. However, the biggest currency story of the month was the Euro, which rallied against all major currencies as Emmanuel Macron comfortably won the final round of the French Presidential elections. The British Pound weakened on jitters over the upcoming general election as well as weakening U.K. economic data. The U.S. Dollar fell against most major currencies on US political events, as well as recognition of the low real interest rates in the U.S.

Iron ore slides

The iron ore price fell to its lowest level since October 2016 as stockpiles continued to grow to unprecedented levels at Chinese ports. Similarly, coking coal posted a double-digit price decline, falling from the previous month's weather-induced peak.

Index Month
(% change)
FYTD
(% change)
1 Year
(% change)
Australian Shares
(S&P/ASX 200 Acc Index)
 -2.8 13.9 11.1
International Shares
(MSCI World Ex Aust 
Unhedged A$Net Return)
  2.8  17.8  13.3
International Shares
(MSCI World Ex Aust
Hedged A$ NetTotal Return)
  1.8  20.4  19.0
US Shares
(S&P 500 Index)
  1.2  14.9  15.0
UK Shares
(FTSE 100 Index)
  4.4  15.6  20.7
Japan Shares
(Nikkei 225 Index)
  2.4  26.2  14.0
Australian Property
(S&P/ASX 200
A-REIT Index)
  0.0  -2.0    1.5
Australian Fixed Interest
(Bloomberg AusBond
Composite Index)
  1.2   1.2    2.5
Australian Cash
(Bloomberg AusBond
Bank Bill Index)
  0.1   1.7    1.8
Currency
AUD/USD
 -0.8   -0.3    2.7