Market Review - an overview of the quarter to 30 September 2017
Global economic recovery continued over the September quarter despite the ongoing geopolitical risks posed by North Korea continuing to conduct missile and nuclear tests that defied United Nations restrictions and which was compounded by further tensions stemming from a ‘war of words’ with US President Trump. As a result, the UN Security Council implemented new sanctions on North Korea. Despite this, and perhaps as markets have become accustomed to ongoing developments, the US Volatility Index continued its material decline to historic lows to end the quarter 15% lower. In the last two weeks of September, several major central banks increased their bias towards monetary policy tightening which, combined with reports of an upside surprise in US inflation, led to a rally in global returns.
In the US, most corporates reported strong earnings results in July, with majority of S&P 500 companies beating earnings forecast. Economic activity also continued to strengthen, with strong jobs growth, and historically low unemployment rate and 3% annualised GDP growth for the June quarter. However, US share prices were depressed for most of the quarter on concerns that persistently low US inflation and consecutive hurricanes might delay interest rate normalisation plans. As a result, the US Dollar Index fell to a 2-year low in early September, which was more than 10% below the highs reached in early 2017 following US President Trump’s election.
Australian share markets were range bound throughout the quarter. From a half yearly corporate reporting perspective, Australian companies delivered mixed earnings results, however, there was an increase in the number of companies failing to meet expectations. Early in the quarter, the Australian dollar (AUD) strengthened significantly, driven by stronger than expected economic growth in China, a sharp increase in commodity prices and a corresponding weakness of the US dollar. However, some of the increase in AUD was reversed towards the end of the quarter due to an increasing divergence in Australia’s monetary policy outlook relative to other developed economies, a near 20% fall in iron ore prices over September and a credit rating cut on China’s government debt by Standard & Poor’s.
The Australian Dollar (AUD) had mixed performance against developed currencies for the quarter. Notably, the AUD appreciated 2.3% against the US Dollar and 2.5% against the Yen, while depreciating 1.0% against the British Pound and 1.3% against the Euro.