Over the month of September, markets experienced a reversal in investor sentiment. Apart from Overseas Small Caps and Emerging Markets, which returned 1.0% and 1.5% respectively for the month, equity markets broadly experienced negative returns.

In sector terms, energy and technology incurred the steepest losses over September. Economic data suggests that the pace of the recovery has begun to slow and as long as restrictions remain in place, it will be difficult to recoup the losses in output experienced over this year. In terms of COVID-19, case growth has remained stable in the US and the situation has improved in Australia and other Asian countries.

The UK, Eurozone and Canada have seen a resurgence in cases, but fatality rates have managed to stabilise in low single-digit levels. India along with other emerging countries remain the epicentre of the disease.

The volatility index (VIX) remained at last month’s level but spiked intra-month. It is expected that the index will continue to rise over the coming months, as the US election moves to the forefront of global news and derivative markets have priced in elevated volatility.

After two dismal months, the US dollar appreciated against most major developed and emerging market currencies, apart from the Japanese Yen and Renminbi.

The boost in demand for safe haven currencies such as the US dollar and Japanese Yen was driven primarily by fears of a slowdown, dampened inflation expectations and concerns over the election.

Despite the heightened volatility over the month, there was no massive rush exhibited towards safe haven fixed interest assets. Credit was relatively flat, returning -0.2% for the month, and global high yield posted modest losses as spreads rose in the risk-off environment. Broadly, sovereign fixed income experienced small gains, with domestic government bonds gaining 1.3% for the month, and hedged overseas government bonds gaining slightly less at 0.8%. Inflation expectations moved slightly lower in September as investors priced in a slowdown in the recovery and thus less upwards pressure on inflation expected over the near term.

The Australian share market has ended its positive run, with the S&P/ASX300 returning -3.6% over September. Developed Overseas Shares also fell over the month, however Australian Shares continued to lag its hedged international counterpart. Healthcare (+0.8%) and Industrials (-0.3%) were the top performing sectors, whilst Energy was once again the bottom performing sector, returning -10.7%.

Significant Developments

• During its early October meeting, the RBA decided to maintain its current policy settings, including maintaining the target cash rate at 0.25% per annum and the targeted 0.25% yield on 3-year Australian Government bonds. Governor Philip Lowe noted that the global economy is gradually recovering after a severe contraction due to the COVID-19 pandemic. However, the recovery is uneven and its continuation is dependent on containment of the virus. Financial conditions remain accommodative around the world and supportive of the economic recovery. Financial market volatility is low and the prices of many assets have risen substantially despite the high level of uncertainty about the economic outlook.
• The Australian economy experienced a sharp contraction in Q2 2020, with output falling by 7%. However, the decline in output was still smaller than most other countries and smaller than expected. A recovery is now underway in most of Australia, although the secondwave outbreak in Victoria has resulted in a further contraction in output. Labour market conditions have improved somewhat over the past few months and the unemployment rate is likely to peak at a lower rate than earlier expected. Even so, unemployment and underemployment are likely to remain high for an extended period. Over the past six months, the Australian economy has been supported by a substantial easing of monetary policy and increased fiscal stimulus. The Board has stated that it will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will remain sustainably within the 2–3% target band.
• Australian seasonally adjusted employment increased by 111,000 in August, above the expectations of a fall of 35,000, while July figures were revised to an increase of 119,200. The unemployment rate decreased to 6.8% for August, below expectations for 7.7%. The participation rate increased to 64.8%, above expectations for 64.6%. Part time jobs increased by 74,800 and full time jobs increased by 36,200.
• Australian building approvals decreased -1.6% month-on-month to August, compared to the previous level of 12.2% (revised) for period ending July.
• The Institute for Supply Management (ISM) Manufacturing Index recorded 55.4 in September, below consensus for 56.5, and below the 56.0 recorded in August. Of the 18 manufacturing industries, Paper Products and Wood Products were the industries that reported the highest growth. Apparel, Leather & Allied Products and Printing & Related Support Activities were the largest detractors over the month. The ISM Non-Manufacturing Index recorded 57.8 in September, above consensus for 56.2 and above the 56.9 recorded in August. Of the 18 nonmanufacturing industries, the top performers in September were Arts, Entertainment & Recreation and Utilities. Professional, Scientific & Technical Services was the only industry, which reported a decrease over the month.
• US Non-Farm Payrolls increased by 661,000 in September, below the 1,489,000 increase (revised) recorded for August. The unemployment rate decreased to 7.9% over September, below expectations for 8.2%.
• US gross domestic product (GDP) third estimate for Q2 2020 is -31.4% quarter on quarter (QoQ) annualised, above expectations for -31.7%.
• The Caixin Manufacturing PMI in China recorded 53.0 in September, slightly below expectations for 53.1, as solid improvement in the health of China’s manufacturing sector continues.
• The Caixin Manufacturing PMI in China recorded 53.0 in September, slightly below expectations for 53.1, as solid improvement in the health of China’s manufacturing sector continues.
• The Eurozone composite PMI decreased to 50.4 in September, slightly above expectations for 50.1. Eurozone operating conditions have only marginally expanded in the private sector economy, as service sector activity slipped back into contraction.
• The final estimate recorded for Q2 2020 Eurozone seasonally adjusted GDP is -11.8% quarter-on-quarter (QoQ) and -14.7% year-on-year (YoY).

Australian Equities

The Australian share market underperformed its hedged overseas counterpart over the month, as the S&P/ASX 300 Index returned -3.6%. The S&P/ ASX Small was the strongest relative performer, decreasing -2.8%, while the S&P/ASX 50 was the weakest, returning -3.8% over the month.

The best performing sectors were Healthcare (+0.8%) and Industrials (-0.3%), while the weakest performing sectors were Energy (-10.7%) and Consumer Staples (-6.6%). The largest positive stock contributors to the index return were CSL, Transurban and National Australian Bank with absolute returns of 0.4%, 5.1% and -0.2% respectively. In contrast, the most significant detractors were CBA, BHP Group and QBE Insurance Group with absolute returns of -6.8%, -5.7% and -18.5%, respectively.

Global Equities

The broad MSCI World ex Australia (NR) Index decreased 0.3% in unhedged terms and -2.9% in hedged terms over the month, as the Australian dollar (AUD) depreciated against most major developed market currencies. In AUD terms, the strongest performing sectors were Materials (+3.0%) and Utilities (+2.7%), while Energy (-11.1%) and Communication Services (-2.4%) were the weakest performers. In AUD terms, the Global Small Cap index was up 1.0% and Emerging Markets index was also up 1.5% over September.

Over September, the NASDAQ decreased 5.2%, the S&P 500 Composite Index decreased 3.8% and the Dow Jones Industrial Average decreased 2.2%, all in USD terms. In local currency terms, major European share markets experienced negative returns as the CAC 40 (France) decreased 2.7% and FTSE 100 (UK) decreased 1.5%, the DAX 30 (Germany) decreased 1.4%. Returns were mostly negative in Asia also, as the Indian S&P BSE 500 (-0.3%), Hong Kong Hang Seng (-6.4%) and Chinese SSE Composite (-5.2%) all decreased, whilst the Japanese TOPIX increased 1.3%.

Real Assets

The Real Assets sector achieved broadly negative returns over September. The Global Real Estate Investment Trusts (REITs) Index decreased by 2.5% over the month and the FTSE Global Core Infrastructure 50/50 Index returned -0.3% (both in AUD hedged terms). Domestic REITs decreased 1.1% over September, whilst the Australian Direct Property (NAV) returned 0.2% on a one-month lagged basis.

Fixed Interest

Global bond markets were broadly positive over September, with the Barclays Capital Global Aggregate Bond Index (Hedged) and the FTSE World Government Bond (ex-Australia) Index (Hedged) returning 0.4% and 0.8% respectively. Ten-year bond yields decreased in most markets including Japan (-3bps to 0.02%), Germany (-9bps to -0.52%) and the UK (-8bps to 0.19%), whilst US stayed flat at 0.68%. Two-year bond yields were also negative over the month, decreasing in Germany (-3bps to -0.69%) and the Japan (-2bps to -0.14%) with the US flat at 0.13%, whilst increasing in the UK (+4bps to -0.02%).

Returns for Australian bondholders were also positive over September, with 10-year (-15bps to 0.84%), five-year (-13bps to 0.33%) and two-year yields decreasing (-9bp to 0.18%). Of the Bloomberg Ausbond indices, the Bloomberg Ausbond Treasury and Bloomberg Ausbond Inflation produced the highest return, increasing 1.3% over the month.

Currency Markets

The AUD Trade Weighted Index decreased to 60.7 over September, down by 3.0% from August. The AUD depreciated against most major currencies, the US Dollar (-3.1%), Japanese Yen (-3.4%), Euro (-1.9%) but appreciated against Pound Sterling by +0.5%.V

Commodities

Iron Ore decreased by 4.0%, finishing the month at US$120.0 per metric tonne. The S&P GSCI Commodity Total Return Index decreased 0.6% over the month. Gold prices decreased from August finishing the month at US$1,899.8 per ounce and the oil price decreased 9.2% to US$41.0 per barrel over September.

Source: Mercer >IS<