Global share markets continued to rise in the last quarter of 2019, with the US and European markets increasing by 9.1% and 5.2% respectively. Over the year international share markets returned an exceptionally strong 28%, which was mostly driven by the US. In Australia the share market increased by just 0.7% for the quarter, but a return of 23.4% for the year was very pleasing. Bond markets pulled back in the December quarter as yields increased from low levels, although a return of 7.3% over the year was far better than expected earlier in the year. Several developments including a partial resolution to the US/China trade situation, interest rate cuts as well as an apparent way forward concerning Brexit, helped send share markets higher in recent months.
Investment markets responded to the news that China and the US had agreed on a ‘Phase 1’ trade deal with enthusiasm well before the deal was made official by both parties. The first phase of a resolution to the US/China trade tensions will involve not only the cancellation of a new 15% tariff which was scheduled to go into force in December, but the halving of an already-imposed tariff to 7.5%. The trade deal is a positive development and comes at a good time for President Trump as the 2020 Presidential Election approaches, as well as for China which has been under pressure with large-scale protests in Hong Kong straining the relationship and the Hong Kong economy. The Hong Kong economy shrunk by 3.2% in the third quarter and is now in its first recession since the global financial crisis.
As this is only the first phase of what is likely to be a longer-term negotiation, there is still expected to be some volatile moments during 2020 which will have short term market impacts. Therefore, investors should continue to be prepared to see both share and bond markets impacted as the next phase of negotiations progress.
December also saw Boris Johnson’s Conservative Party claim a decisive win in the UK general election, with the Party increasing its numbers in the lower house, and Labour leader Jeremy Corbyn announcing that he will step down. This result was significant as it provides some certainty to the UK leaving the European Union (EU), and allows parliament to move on with the next phase of the process. Parliament is expected to pass the legislation required for the UK to leave in January, while policymakers will have the remainder of 2020 to enter trade agreements in order to achieve a ‘soft Brexit’. The details of any trade agreement will likely continue for most of 2020, but hopefully reasonable compromises on both sides will result in a smooth exit at the end of the year.
As widely expected by investors, during the quarter the US Federal Reserve cut their cash rate for the third time in 2019 to 1.75%. The decision was taken by investors as further evidence that the central bank is firmly in cutting mode, which is interesting given it was only in 2018 that rates were on the rise.
Offshore rate cuts can heavily influence policy in Australia, and at the October meeting of the Reserve Bank of Australia (RBA) cash rates were cut by 0.25% to a new low of 0.75%. Whilst the RBA have signalled that interest rates are steady for now, markets expect that at least one more rate cut is possible over the next six months. Optimism spurred by rate cuts and encouraging strength in the housing market, which has seen Sydney dwellings rise in price by more than 5% for the year, was offset by the tragic bushfires which escalated in recent months. Although the full impact of the fires will be unclear for some time, in the near term we would expect some negative impact from reduced tourism and agriculture industries, but longer term the re-building phase will boost economic activity.
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