Market and Economic overview
The Australian dollar appreciated to a three-month high against the US dollar, reflecting optimism that a trade deal between the US and China might be close to being agreed.
The local currency added 2.1% against the US dollar, closing the month of October at 68.9 US cents.
The ‘Aussie’ appreciated on other exchanges too, adding 1.4% against a trade-weighted basket of international currencies.
Commodity prices were mostly higher during October, amid easing trade tensions between the US and China.
Most industrial metals posted gains, including zinc (+8.1%), aluminium (+2.9%), copper (+2.5%) and lead (+2.2%).
Nickel (-6.2%) was a notable exception, falling amid policy uncertainty around Indonesia’s proposed nickel ore export ban.
Iron ore (-10.5%) fell sharply, primarily on an improving supply outlook.
Brazilian mining giant Vale continued to bring production back online following severe supply disruptions earlier in the year.
Precious metals were mostly higher, including gold (+0.5%), silver (+3.1%) and platinum (+5.0%). Oil (Brent +2.8%) finished higher, as progress appeared to be made towards a resolution of the US/China trade war.
The Australian share market started October with its worst weekly return in nearly a year.
Reinvigorated fears of a weakening global economy, disappointing manufacturing data and ongoing Brexit uncertainty weighed on the index.
The market since recovered, as Australian shares followed global peers higher following some reasonably solid corporate earnings numbers in the US.
In the month as a whole, the S&P/ASX 100 Accumulation Index declined -0.4%. Small companies (-0.5%) once again underperformed their large cap peers, extending their underperformance to -2.9% in 2019 to date.
The S&P/ASX Small Ordinaries Accumulation Index was dragged lower by the drastic decline in Southern Cross Media (-33.6%) following a quarterly update that showed revenues had slumped -8.5%.
Global listed property was up modestly in October. The FTSE EPRA/NAREIT Developed Index returned 0.4% in AUD terms, performing in line with the broader global equity market.
The UK was the best performing property market (+5.0%) for the second consecutive month as the perceived likelihood of a ‘no deal’ Brexit continued to wane.
In Australia, AREITs returned 1.2% for the month, with the Diversified (+1.9%) and Industrial (+1.5%) sub-sectors leading the charge.
Global equities maintained their upward momentum from September.
Investors were heartened by the announcement of a “limited trade deal” between the US and China and a reasonably solid corporate earnings reporting season in the US.
Together, these positive influences powered the S&P 500 Index in the US to new all-time highs.
The MSCI World Index jumped 1.9% in local currency terms in October, also to a new high, although Australian dollar strength reduced the equivalent returns to just 0.4% for Australian-based investors.
The Japanese Nikkei jumped over 5.0% in local currency terms and was the strongest market for a second consecutive month.
UK shares struggled with the ongoing Brexit shenanigans. Having been down as much as -4.4% in local currency terms, the FTSE recovered to be down just -1.9% by month-end as the probability of a ‘hard Brexit’ dissipated.
The improved trade outlook helped emerging markets to outperform developed markets for the first time since January.
The MSCI Emerging Markets Index rose 2.0% in AUD terms, led by particularly strong returns from Russian stocks.
Global and Australian Fixed Interest
Government bond yields rose for a second consecutive month, resulting in negative returns from most fixed income markets.
While economic data remained reasonably downbeat, hopes of a possible partial resolution to the US/China trade standoff saw yields edge higher.
Bond market participants appear to be thinking that we have likely already seen most of the likely interest rate cuts worldwide and that further moves could be some time away.
In the US, 10-year Treasury yields closed the month just 3 bps higher, at 1.69%, but there were larger moves elsewhere.
Yields rose 16 bps and 14 bps in Germany and the UK respectively, for example, and by 8 bps in Japan.
Ten-year Australian government bond yields closed October 12 bps higher, at 1.14%, despite the Reserve Bank of Australia’s interest rate cut at the beginning of the month.
Corporate bonds eked out modest gains in October, partly reflecting ongoing strong inflows into the asset class and a limited amount of new issuance.
Overall, investors seemed comfortable with September quarter earnings reported by US firms. Manufacturing-related businesses continue to face headwinds.
Encouragingly, however, demand among US consumers for goods and services appears to remain intact.
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