• October was a volatile month as a number of events conspired to create uncertainty. In addition to the ramp up to the US election, there was speculation over the UK and their application to the EU to formally exit, this resulted in considerable weakness in the British pound. The UK is being watched eagerly by many commentators as it provides a live case study of both a country leaving the European Union and a country switching from monetary to fiscal policy. How well it navigates these two major policy shifts will determine how many other countries may potentially follow suit.
• US headline inflation data was stronger than expected in September and the evidence of increasing price pressures has fuelled expectations for a rate rise at the December Federal Open Markets Committee (FOMC) meeting. Any rate increases are likely to be gradual in light of the challenges facing the US in the coming months, including a potentially stronger US dollar.
• China’s economic growth remained steady at 6.7% in the third quarter, in line with expectations and well within the government’s 6.5-7% growth target for the year. Growth was driven by domestic consumption and the services sectors, while trade and investment were weaker – a trend the authorities have been trying to engineer in recent years so overall growth would be more sustainable
• Australian shares endured another month of negative returns, dragged down by the larger proportion in defensive sectors. The big story for the period was the change in bond yields, which affected listed property, Telcos and Utilities. Healthcare was the weakest sector. Mining was again the best performing sectors, underpinned by strength in Chinese steel production, and banks were not far behind
• International market shares fell again, however the weaker Australian dollar helped dampen the fall. Japanese shares performed well thanks largely to a weaker Yen, whilst in the US The S&P 500 ended the month down 1.9%. European shares also fell, while UK shares were off the most due to a weaker pound, as the probability of a rate cut fell with a spike in inflation.
• Emerging markets continued to perform well, supported by investors seeking growth assets and a better than expected forecast for China and commodity prices
• Global Listed Property had another tough month as investors rotated out of the bond-sensitive sectors based on the expectation of increase interest rates in the US.
• The Reserve Bank of Australia (RBA) kept interest rate policy unchanged at its November meeting based on recent economic data. The unemployment rate fell to a three year low of 5.6% in September, but full-time employment has also fallen by an average of almost 30,000 in the past three months. Other considerations for the RBA will be the housing market and the renewed strength in the Australian dollar. Whilst the RBA is monitoring trends in full-time employment with some caution, the net impact of rises in house prices and confidence that the economy is forecast to grow at its potential rate, suggests further rate cuts are unlikely, at least in the short term.
• With no further interest rate cuts exacted Australian bond yields sold off heavily, with 10 year Australian government bond yields rising to 2.34%. Internationally there was a significant sell-off in bond yields, this was started by initial market speculation that the European Central Bank (ECB) was contemplating reducing ongoing stimulus measures, whilst at the same time investors increased expectation for future rate increases by the US Federal Reserve. This saw negative returns for most fixed income indices.
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