Market Wrap - November 2018

November 2018

At a glance

Global stocks in November rose for the fourth month in the last five after the Federal Reserve said the US cash rate was close to its ‘neutral level’ and the US economy displayed strength. Gains were capped, however, as doubts emerged about the global economic outlook and political concerns mounted in Europe. An increase in the Australian dollar, however, turned a gain into a loss for those who have unhedged investments in global equities. During the month, eight of the 11 sectors rose in US-dollar terms. Healthcare (+5.5%) and real estate (+4.5%) rose most while energy (-3.6%) fell most. The Morgan Stanley Capital International (MSCI) World Index rose 1.1% in US dollars but fell 1.8% in Australian currency.

 

Australia

Australian stocks tumbled for a third consecutive month as lower oil and iron ore prices hit energy and material stocks, a higher Australian dollar hindered export stocks, and political uncertainty jumped after the Coalition Government lost its majority in the lower house. Energy stocks plunged 10%, to be the worst-performing sector, after global oil prices fell more than 20% on glut concerns. Materials lost 4.9% after iron ore prices sagged 13% on doubts about China’s economy. A 3.3% increase in the Australian dollar against the US currency (and a 2.3% gain on a trade-weighted basis) undermined stocks that source much of their revenue from overseas. The resignation of federal MP Julia Banks from the Liberal Party now means the Coalition only controls 74 of the 150 seats in the lower house. The defeat of the Coalition in the Victorian state election also fanned speculation of the Federal Government’s reelection next year. Economic news was more on the downbeat side. Retail sales only grew 0.2% in September, amid concerns the housing crisis could undermine consumer demand. The NAB business survey showed confidence and conditions fell 2 points to +4 and +12 respectively. As expected, the Reserve Bank of Australia’s policy-setting board kept the cash rate at the 1.5% on which it has sat since August 2016. The S&P 200 Accumulation Index slid 2.2%

US

US stocks rose for seventh month in eight on talk the Fed would slow its program to raise interest rates, companies posted healthy earnings growth for the third quarter and US bond yields fell. On November 28, Fed Chairman Jerome Powell sparked the biggest one-day rally since March when he said rates are “just below” the level where they are neither speeding up nor slowing economic growth. At its policy-setting meeting earlier in November, Fed policymakers left the key rate unchanged at 2% to 2.25% and did nothing to quell talk that the ninth post-crisis rate increase could happen in December. In other economic news, a report confirmed the US economy expanded at an annualised pace of 3.5% in the third quarter. Other reports showed consumer spending rose 0.6% in October, the biggest increase in seven months. The jobless rate stayed at a 49-year low of 3.7% in October, and the housing market is still weakening. Financial research and data company FactSet said S&P 500 companies reported 25.9% earnings growth for the third quarter, the best result in eight years. The US 10-year government bond yield fell 16 basis points to 2.99% over the month, helped on the last day by a report that showed the Fed’s preferred measure of inflation fell to 1.8% in the 12 months to October, down from 2% at the end of September. The S&P 500 Index added 1.8%.

Europe

European stocks fell for the third month in four as political concerns about Italy, France and the UK grew and the risk of a recession in the eurozone rose. Italy’s new government failed to resolve an impasse over its proposed budget deficit for fiscal 2019 that breached EU rules for indebted governments. France, viewed as a source of stability since the centrist and pro-Europe Emmanuel Macron won the presidential election last year, erupted in protests after a tax on petrol and diesel was increased to curb their use for environmental reasons. In the UK, the government of Theresa May struggled to win domestic support for the leaving agreement with the EU that faces a parliamentary vote. Concerns that the eurozone economy is stalling mounted after the IHS Market index of German manufacturing fell to a four-year low of 50.2 in November, where 50 separates growth from contraction. The Euro Stoxx 50 Index dipped 0.8%.

Asia and emerging markets

Japanese stocks rose for the fifth month in six on hopes the US and China would patch their differences on trade. Chinese stocks edged up for the same reason. Emerging markets overall rose as the emerging currencies that fell most around mid-year have staged partial recoveries. Japan’s Nikkei 225 Index rose 2.0%. China’s CSI 300 Index rose 0.6%. The MSCI Emerging Markets Index rose 4.1% in US dollars, only its third monthly gain in 2018.

 

Movement in benchmark indices are in local currency unless stated otherwise. As is common practice, all indices mentioned are price indices apart from the MSCI indices and the S&P 200 Accumulation Index.

Sources: J.P. Morgan, FactSet, The Financial Times, Bloomberg and national statistical including the Australian Bureau of Statistics, Eurostat, the US Department of Commerce and the US Department of Labor.