Market Wrap - October 2018

October 2018

At a glance

After a rise in US bond yields to seven-year highs on signs of the strong US economy, global stocks in October plunged their most in six years, casting doubts on the outlook for the global economy. The decline was exacerbated as the trade war between the US and China intensified, European political risks grew, and reports showed the Chinese and eurozone economies were already slowing. A drop in the Australian dollar reduced losses for those who have unhedged investments in global equities. During the month, all 11 sectors fell in US-dollar terms. Industrials (-10.3%) and energy (-10.1%) fell most while the defensive sectors utilities (-0.7%) and consumer staples (-1.5%) fell least. The Morgan Stanley Capital International (MSCI) World Index dived 7.3% in US dollars, its biggest decline since May 2012, and 5.4% in Australian currency.

Australia

Australian stocks dropped amid the global slump as lower crude prices battered oil stocks, materials stocks fell on concerns that trade wars are hurting China’s economy, and federal government measures to contain electricity price increases hit energy retailers. Stocks fell even though reports on the Australian economy were upbeat. The jobless rate fell to a six-year low of 5.0% in September, and retail sales rose 0.2% in August while the NAB business survey showed business confidence rose +1 to +6 in September. Consumer prices only rose 0.4% in the September quarter, to give a 12-month rate of 1.9%, just below the Reserve Bank of Australia’s 2% to 3% target band. As expected, the RBA’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 lost 6.1%.

US

US stocks fell for the first time in seven months after US 10-year bond yields peaked at 3.25% after reports showed the US economy was strengthening enough to fan inflation – 10-year Treasury yields ended the month at 3.14%, up 8 basis points on September’s close. Among the upbeat economic news was that the jobless rate dropped to a 49-year low of 3.7% in September, the economy grew at an annualised rate of 3.5% in the third quarter and consumer confidence rose to an 18-year high in October (as measured by The Conference Board). During the month, President Donald Trump said the Federal Reserve is his “biggest threat” as he criticised the central bank increasing the US cash rate eight times since 2015 and for “raising rates too fast”. Minutes released from the Fed’s policy-setting board meeting in September showed that Fed officials are debating how quickly they need to boost rates to ensure inflation stays tame. The Fed’s preferred inflation barometer, the personal consumption expenditure price index, only rose 0.1% in September, the fourth straight month it has stayed below a speed that would take the annualised rate beyond the Fed target of 2%. US stocks declined even though companies on average beat expectations when reporting earnings for the third quarter. Financial research and data company FactSet said 77% of the S&P 500 companies that had filed earnings by October 29 surprisingly had upside compared with the five-year average of 71%. The S&P 500 Index lost 6.9%. 

Europe

European stocks plummeted as political uncertainty gripped Germany, Italy and the EU came to an impasse over the Italian budget for 2019, and a report showed the eurozone’s economic growth halved in the third quarter. German politics was rocked when the political party (and its Bavarian equivalent) led by Chancellor Angela Merkel fared poorly in two state elections, and she has stated she would step down as leader of the Christian Democratic Union in December. This unexpected decision raised doubts about how long Merkel can survive as leader of Europe’s biggest economy (which she can do even after stepping down as party leader). Concerns about Italy grew after the European Commission for the first time rejected a country’s budget when it told Italy to “revise” its budget deficit for next year to meet EU guidelines for indebted countries. A report showed the eurozone economy only expanded 0.2% in the September quarter, half the 0.4% speed it recorded in the previous three months. The Euro Stoxx 50 Index shed 5.9%.

Asia and emerging markets

Japanese stocks plunged when the Bank of Japan’s statement that it won’t meet its 2% inflation forecast until 2020 raised doubts about whether or not Japan would escape deflationary forces. Chinese stocks dived as economic growth slowed to an annual pace of 6.5% in the third quarter (from an annual 6.7% in the second quarter), manufacturing growth almost stalled in October, and the yuan dropped amid an intensification of the China-US trade war. Emerging markets recorded their eighth decline in nine months even though the victory of right-wing candidate Jair Bolsonaro in Brazil’s presidential election sparked a 10% surge in Brazilian stocks. Japan’s Nikkei 225 Index slumped 9.1%. China’s CSI 300 Index dropped 8.3%. The MSCI Emerging Markets Index lost 8.8% in US dollars.

 

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.