Market and Economic overview
The subdued inflation print for the March quarter brought forward expectations of an interest rate cut in Australia. At the end of April, money markets were implying a 36% chance of a rate cut in May, and a 72% probability of a cut by the end of June. A second cut has also been priced in by year-end. These evolving forecasts were reflected in currency movements relative to the US dollar. The AUD closed April at US$0.705, a depreciation of 0.7% over the month.
Commodity prices were mostly higher during April as concerns around US-China trade wars eased. Chinese policy support, via tax cuts and infrastructure projects, was also broadly supportive.
Iron ore (+5.5%) prices rose, as lower port stockpiles in China signalled shortage concerns. Stockpiles are declining as the fallout from the dam disaster at Vale’s Feijao iron ore mine in late January is now being felt at ports in China. Oil (Brent crude +3.8%) moved higher, driven primarily by OPEC-led supply cuts and robust demand.
Industrial metals were mostly lower during the month. Zinc (+1.4%) and copper (+0.2%) edged higher, while lead (-3.2%), Aluminium (-4.3%), nickel (-7.1%) and tin (-7.3%) all lost ground. In the precious metals sector, gold (-0.7%) and silver (-1.1%) edged lower, while platinum (+4.3%) bucked the broader trend, posting relatively strong gains.
An improvement in sentiment enabled the S&P/ASX 100 Accumulation Index to return 2.3% in April. A positive start to the US earnings season combined with increasingly dovish commentary from global central banks supported the performance of Australian shares.
Consumer Staples was the best performing sector, adding 7.9% as all constituents registered positive returns. The Financials sector recovered from March weakness, rallying 4.3%. With the exception of Suncorp Group, all major and regional banks added value.
Bond-proxy sectors including REITs and Utilities under-performed. A modest increase in bond yields reduced the appeal of yield-generating equities. Small caps outperformed their large cap peers, with the S&P/ASX Small Ordinaries Accumulation Index rising 4.1%.
Global listed property trailed broader equity markets, with most property markets posting negative returns for the month. The FTSE EPRA/NAREIT Developed Index returned -1.3% in USD terms and -0.4% in AUD terms. New Zealand (+3.7%) was the best performing property market, while Japan (-3.6%) was the worst performer.
In Australia, the S&P/ASX 200 A-REIT Index returned -2.6%. Office A-REITs (-1.3%) was the best performing sub-sector, followed by Industrial A-REITs (-1.4%). Retail A-REITs underperformed, returning -3.8%. Outperformers in Australia included Unibail-Rodamco-Westfield (+6.4%) and Mirvac (+4.0%). Underperformers included GPT Group (-6.1%) and Scentre Group (-5.6%); both struggled following Q1 operating updates.
The MSCI World Index rose 4.6% in AUD terms, pushing global equity markets up to all-time highs. The weaker AUD helped to bolster returns, with the corresponding Index up ‘only’ 3.8% in local currency terms. The S&P 500 Index rallied 4.0% in USD, registering fresh record highs on the last day of the April.
The increased prospect of interest rate cuts in the US, a more positive corporate earnings season than anticipated, a stronger energy sector driven by rising oil prices and reports that “substantial progress” is being made in the US-China trade talks all helped to drive US stocks – and global markets more broadly.
Germany’s DAX recovered from a weak March result to be the strongest performer over April, rising 7.1% in euro terms. Economic sentiment and unemployment numbers both improved in Germany and investors responded particularly positively to the reduced risk of an escalation in trade tensions.
The Japanese Topix was a laggard for the second month in a row, managing only a 1.9% gain in yen terms. Investors were disappointed as industrial production and balance of payments numbers showed that the country’s manufacturing sector was struggling as export demand faltered.
Emerging markets enjoyed a sixth successive month of positive returns, with a 3.1% rise in AUD terms. Stocks in the EMEA region outperformed, supported by strong gains in South Africa. Latin America was the weakest EM region. Investors appeared to be losing faith in the new Brazilian president’s ability to drive reforms through congress.
Global and Australian Fixed Interest
Global bond yields rebounded a little in April, having fallen sharply in the March quarter. Benchmark 10-year US Treasury yields closed the month 10 bps higher, at 2.50%. Germany, yields clawed their way back into positive territory, closing 8 bps higher at 0.01%. Japanese yields remained negative, at -0.05%, despite rising 4 bps over the month.
Among the most significant moves was in the UK, where 10-year yields rose 19 bps, to 1.19%. The gilt market remained affected by Brexit-related developments. In Asia, Chinese local currency bonds were added to the Bloomberg Barclays Global Aggregate Index. Over time this is expected to result in broad-based buying, although prices dipped immediately after the addition as yields rose sharply. Chinese 10-year yields closed April 33 bps higher, at 3.40%. Australian CGS yields were almost unchanged in April, closing the month at 1.80%.
Credit spreads tightened further, supporting corporate bond prices and enabling global credit markets to register a fourth consecutive month of positive returns.
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