AUGUST MARKET COMMENTARY

Economic commentary August 2018

August saw a mixed month for the markets with heightened tensions in the global trade front, directing negativity towards emerging-markets currencies.

The major US indices pushed ahead strongly, while European markets were mostly lower, on political concerns, with Chinese shares suffering sharp falls.

Emerging market currencies were battered by heavy sell-offs in the Argentine peso and Turkish lira, the former after Argentina asked the International Monetary Fund (IMF) to speed-up the release of a US$50 billion loan, and the latter in the wake of US announcing sanctions on the country, exacerbating concerns over these already weakened economies.

In the United States, despite the now-familiar supply of bad political news emanating from the White House and an increase in trade tensions, the stock market was pushed higher by a combination of double-digit corporate profit growth, further signs of economic growth and the US Federal Reserve signalling a gradual pace of interest-rate rises.

US economic growth for the second (June) quarter was revised upward from the 4.1% annualised pace initially reported, to 4.2%, representing the strongest growth pace since the third quarter of 2014. The upgrade put the US economy on track to hit the Trump administration’s goal of 3% annual growth.

However, growth in consumer spending, which accounts for about 70% of US economic activity, was lower at 3.8% in the second quarter instead of the previously reported 4% pace. But US consumer confidence surged to an 18-year high in August, well ahead of economists’ forecasts.

On trade, President Trump appeared to contemplate new tariffs on China; the risk of the US imposing tariffs on imports from the EU reappearing; talks to revise the North American Free Trade Agreement (NAFTA) ending with a deal between the US and Mexico but an impasse between the US and Canada; and August culminating in President Trump threatening to withdraw the US from the World Trade Organization (WTO), claiming it treats his country unfairly.

But the US markets chose to focus on the fundamentals, with the Dow Jones Industrial Average rising 2.2%, the broader S&P 500 Index gaining 3.3% and the technology-heavy Nasdaq Composite Index surging 5.7%, in the best August performance for the Nasdaq since 2000. The S&P 500 and the Nasdaq notched a fifth positive month in a row, while the Dow has gained for two straight months.

Meanwhile in Europe, continued concerns over the Brexit negotiations, Italy’s budget, currency contagion from the Turkish lira and upcoming elections in Bavaria and Sweden combined to dampen markets, with the broad STOXX EURO 600 Index losing 2.1% in August, in its weakest monthly performance since March. In Germany, the DAX Index lost 3.5%, while France’s CAC 40 was down 1.9% and the Italian benchmark, the FTSE-MIB Index, plunging 8.8%. In London, the FT-100 Index gave up 4.1%, its biggest monthly drop since August 2015.

In Asia, Japanese second-quarter GDP growth was estimated on preliminary numbers to be 0.5% quarter-on-quarter, recovering from a decline of 0.2% in the first quarter. The strong performance avoided technical recession, with GDP rising at an annual pace of 1.9%, well ahead of forecasts of 1.4%. The recovery was powered by a pick-up in domestic demand, with private consumption growing at an annual pace of 2.8%, after coming in flat in the first quarter while corporate investment grew at an annual rate of 5.2%.

Across in China, the official manufacturing purchasing managers' index (PMI)) figure, which measures the country’s factory activity, recovered slightly in August, edging up to 51.3 in August from July's 51.2, according to the National Bureau of Statistics (NBS). The index has now stayed above the 50 level, which marks growing activity as opposed to a contraction, for two years. China's official non-manufacturing PMI rose to 54.2 in August from 54.0 in July.

The private Caixin China manufacturing PMI – which tracks small, private manufacturers, compared to the large state-owned companies picked up in the official data – slipped to 50.6 in August from 50.8 in July, according to Caixin Media Co. and research firm Markit. The reading was the lowest level since June 2017, though it still remains above the 50 mark.

Elsewhere, the South Korean government unveiled a stimulatory budget for 2019, with plans for a 10% increase in government spending. On the markets, Tokyo’s Nikkei index advanced 1.4%, flirting with the 23,000-point level late in the month, but failing to hang on. In Hong Kong, the Hang Seng Index surrendered 2.4%, for its fourth straight monthly loss, while on the mainland, the Shanghai Composite Index lost 5.2%. Korea’s KOSPI Index added 1.2% for August.

In Australia, the Reserve Bank of Australia’s Statement on Monetary Policy indicated that the RBA is in no hurry to change its policy stance until its forecasts of underlying inflation reach 2.5%. Currently, the central bank maintains a forecast for 2.25% headline and underlying inflation out to June 2020. The RBA held official cash rates steady in August at 1.5%, where the rate has been for two years. The RBA continues to expect the economy to grow at an “above-trend” pace, with gross domestic product predicted to increase at an average rate of 3.25% this year and the next, before average growth over 2020 eases to 3%.

Australia’s July employment data showed the unemployment rate had fallen to 5.3% from 5.4%, largely helped by a fall in the participation rate. The Australian Bureau of Statistics (ABS) released employment estimates for July which indicated the total number of people employed in Australia in either full-time or part-time work fell by 3,900, but the Australian economy had produced 300,000 jobs in the last twelve months.

Figures from property research firm CoreLogic showed that Australia’s housing market downturn continued for the 11th consecutive month in August, with national dwelling values falling by 0.3% over the month to be 2.2% below their peak in September last year. This was led by Sydney house prices, which finished August 5.6% lower than a year ago.

The S&P/ASX 200 overcame August’s political turmoil – which saw the appointment of Australia’s fifth Prime Minister in as many years – to close the month with a 1.4% gain on a total-return basis, its fifth consecutive monthly rise, the best streak since 2012. The benchmark’s industrial component drove the gain, up 2.9%, while the S&P/ASX 200 Resources Accumulation index shed 4.4%.

On the commodities front, Brent crude oil jumped 4.3% in August, while its West Texas Intermediate counterpart was up a more sedate 1.5%. Gold was down 1.9% for the month, while LME copper slumped 5.1%, after a 4.9% slide in July. Iron ore gained 1.8%. Flat iron-ore prices, continued strength in the $US and a further narrowing in interest-rate differentials all helped push the $A lower in August. The Aussie dollar fell by 3.2% against the greenback in August, finishing at 71.89 US cents.

Information current as at August 2018. This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This article may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material.