The market wrap is a summary of December's economic highlights across the globe.
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Arguably the most significant development of the month was the agreement of a ‘phase one’ trade deal between the US and China.
Exact details have not been released, but US negotiators had reportedly offered to significantly reduce existing tariffs on ~A$500 billion worth of imports from China. In return, China pledged to buy large quantities of agricultural produce from the US and boost the protection of US intellectual property rights.
In economic news, employment trends remained encouraging. 266,000 jobs were created in the US in November – the highest monthly number since January 2019. Estimates for the prior month were also increased. As a result, the official unemployment rate ticked down to just 3.5%.
Most US workers also enjoyed reasonable pay rises in 2019. On average, wages are growing at an annual pace of more than 3%, easily outpacing gains in Australia.
Stronger employment data was inconsistent with other indicators. Surveys of activity levels in the manufacturing and non-manufacturing sectors, for example, both indicated further weakness.
The pace of growth in the world’s largest economy is undoubtedly tailing off. It will be interesting to see whether further interest rate cuts are required this year. The Federal Funds rate was unchanged in December, but at least one more rate cut is anticipated during 2020.
GDP data for the September quarter confirmed that growth remains subdued and below long-term averages.
The Australian economy expanded just 0.4% during the period, which was slightly below expectations.
October retail sales were worryingly weak too, despite many consumers having additional disposable income following tax cuts and lower mortgage costs. Anecdotal evidence suggests November and December retail sales were subdued as well, though the next official data will not be released until 9 January.
The job market improved in November from a poor October, with nearly 40,000 new jobs created. Only around one in ten of these roles was full time, however. Employers appear unwilling to increase their full time workforce, perhaps due to the uncertain economic outlook.
House prices continued to rise – most notably in Sydney and Melbourne – which could help support sentiment in 2020.
The major development came in the UK, where a resounding victory for incumbent Prime Minister Johnson in the general election effectively gave a green light for Brexit to be completed before the revised 31 January deadline.
Johnson had campaigned with a ‘Get Brexit Done’ message, which appeared to resonate with the electorate. The election resulted in the biggest majority in Parliament for more than 30 years.
The proposed Withdrawal Agreement passed easily with new MPs following the election and is expected to be formally ratified in January.
Policymakers can then try and address the economic slowdown in the UK. The economy did not grow at all in the three months ending 31 October and industrial production is below levels from a year ago.
Construction output has also fallen over the past year and inflation is running below target.
Markets are suggesting there is a ~40% probability that UK interest rates are lowered this year to try and lift activity levels.
Conditions also remain challenging in Continental Europe. German industrial production is running ~5% below 2018 levels and consumer confidence is at its most subdued in three years.
In France, consumer spending remains sluggish and inflation is well below target.
The European Central Bank’s asset repurchase program is continuing – at €20 billion per month – to provide support to the ailing economy.
Like elsewhere, attention was dominated by the ‘phase one’ trade deal reportedly agreed between Chinese and US officials.
The hope is that a reduction in tariffs will see export volumes to the US improve – for now, Chinese exports are below levels from a year ago. This has translated into a slowdown in the manufacturing-led economy. Chinese GDP growth has slowed to a 30-year low.
Domestic demand in China is holding up rather better. Retail sales growth is increasing at an annual pace of 8%, providing important support to overall growth.
Industrial production also remains subdued in Japan and exports are well down on 2018 levels.
Elsewhere, Kim Jong-Un, Supreme Leader of the Democratic People’s Republic of Korea, hinted the country would step up its missile testing program in 2020.
The country continues to suffer through severe economic sanctions, but appears determined to develop a nuclear arsenal that the leader believes will force the US to compromise on its hard-line stance.
The Australian dollar strengthened quite substantially in December. The currency added 3.8% against the US dollar, 3.0% against the Japanese yen and 2.2% against a trade-weighted basket of international currencies.
The ‘Aussie’ is now back around the US$0.70 level, ending the year almost exactly where it started it.
Most commodities finished in positive territory following completion of ‘phase one’ of the US-China trade deal.
Iron ore (+9.5%) performed well, as Chinese policymakers said they would maintain economic growth in a ‘reasonable range’ in 2020, suggesting policy easing measures and infrastructure spending are likely.
Oil (Brent +9.2%) tracked higher over the month on US/China trade optimism and falling US stockpiles.
Precious metals were mostly higher. Gold (+3.7%) found some ‘safe haven’ support, while silver (+6.4%) and platinum (+7.9%) also rose.
Aluminium (-0.6%), lead (-1.2%) and zinc (-0.8%) were little changed, while copper (+5.2%) posted stronger gains.
Australian equity markets experienced a near 4% drop in the first week of December as a disappointing third-quarter GDP result and volatile geopolitical news flow saw investors move into ‘risk-off’ mode.
Subsequent data releases, growing expectations of additional interest rate cuts and progress in trade discussions drove an improvement in sentiment as the month progressed. The S&P/ASX 100 Accumulation Index recovered somewhat to end the month -2.2% lower.
Rising commodities prices helped push the Materials sector +1.4% higher. Whilst the higher gold price aided Northern Star Resources’ +17.9% rally, it was the announced purchase of Kalgoorlie Lake View, owner of a 50% share in various mines including the ‘Super Pit’ in Kalgoorlie, and positive production news from the Alaska-based Pogo mine that excited investors.
The Consumer Staples sector was at the other end of the spectrum, declining -8.6% as all constituents dropped lower.
Winemaker Treasury Wine Estates tumbled -13.2% as data trends indicated that sales continue to lag in the US market, despite higher promotional activity. The continued run of weak wine import data from China placed additional downward pressure on the share price.
Small companies broke their run of underperformance compared to their large cap peers, with the S&P/ASX Small Ordinaries Accumulation Index falling a modest -0.3%. Small mining companies provided the best returns, with both Syrah Resources and Perseus Mining both surging more than 30%.
Property shares lost ground in the final month of the year, with the S&P/ASX 200 A-REIT Index closing -4.4% lower.
Returns were behind the broader Australian market in both December and in the full year, but 2019 was nonetheless a pleasing year for investors in the sector. Listed property stocks returned +19.5% over the full 12 months.
Performance during December was hampered by the disappointing performance of Goodman Group. The stock slumped more than -8% over the month, declining to its lowest level since May and dragging down returns from the Industrial sub-sector.
The month saw a reasonable amount of transactions and equity raisings – Scentre Group and Charter Hall were among several REITs to make new acquisitions over the month.
Overseas property stocks eked out modest gains in local currency terms, but returns were negative for Australian investors due to Australian dollar strength.
Hong Kong was among the best performing international markets, following a few months of subdued performance where social unrest had eroded sentiment.
Global equities established new all-time highs, in local currency terms, towards the end of December as data reads gave increased hope that the global economy might have bottomed and as speculation mounted that a ‘phase one’ trade deal between the US and China was imminent.
However, the associated rally in the Australian dollar (AUD) more than offset share market gains for local investors; the MSCI World Index dipped -0.9% in AUD terms over the month.
The US market once again led other bourses in December – with the S&P 500 (+3.0%) just pipping the UK’s FTSE 100 (+2.8%) over the final days in local currency terms. Post-election euphoria in Britain gave way to concerns over the complexities ahead in negotiating a trading relationship with the EU post Brexit and the implications of that uncertainty on the UK economy.
The Australian market was one of the only developed markets to suffer a negative return over the month. The German market only narrowly missed a similar fate – eking out a meagre +0.1% in local currency terms.
Having been persistent underperformers for most of 2019, emerging markets came back in the final month of the year with the MSCI Emerging Markets Index rising +3.5% in AUD terms, extending gains to +19.1% in the calendar year.
Korean stocks enjoyed the strongest bounce in December, with the MSCI Korean index jumping +8.1% in Korean Won – largely on the rising hopes of a US/China trade deal. This helped it to draw away from the single figure laggards of Mexico and South Africa, which only managed +7.2% and +7.6% respectively in local currency terms for the year. Both countries are plagued with a combination of economic and political difficulties.
Global and Australian Fixed Income
Government bond yields rose globally, which resulted in negative returns from fixed income securities.
Among major markets, the moves were most extreme in Australia and Germany – benchmark 10-year yields rose more than 30 basis points in both countries.
There were no particularly surprising economic data or developments over the month. Instead, sentiment was dominated by the perceived reduction in geopolitical risk.
Most significantly, the agreement of a trade truce between the US and China could potentially remove – or at least moderate – a meaningful headwind to global growth in 2020.
An improvement in economic activity levels in the world’s two largest economies would lift global growth forecasts and reduce the likelihood of further interest rate cuts in the year ahead.
At the same time in Europe, victory for the ruling Conservative Party in the UK general election greatly increased the probability of the Brexit process being completed in early 2020. Again, this would remove an important source of uncertainty for global markets and, potentially, reduce the appeal of global bonds as a relatively stable, defensive asset class.
The general improvement in risk appetite globally was reflected in credit markets.
Corporate bond spreads narrowed in both the investment grade and high yield sectors, as investors suggested the reduction in geopolitical risk globally would support corporate earnings and help mitigate the risk of defaults.
Investment grade spreads closed the year below 1%, at their lowest levels for nearly two years. High yield spreads also closed December at their lowest levels for the year.
Strong performance was seen across the board, with issuers in the US, Europe and Asia all well supported over the month.
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