Economic commentary June 2018

3 min read

Rising concerns over the possibility of an escalating US-China trade war unsettled global share markets in June.

Many market indices fell in the second half of the month, but not by enough to drag all into negative territory. However, between June 12 and the markets’ close on June 29, global market capitalisation fell by US$1.75 trillion.

Trade-war concerns saw the Chinese yuan post its worst month on record in the traded markets, losing 3% against the US dollar. The greenback became the safe-haven investment of choice for defensive-minded investors – usurping gold’s traditional role – and was also helped by the US Federal Reserve both raising interest rates for the second time this year, in June, and revising up its expectation for interest rate hikes, as the US Fed Chair, Jerome Powell, in his comments, appeared highly optimistic about the present health of the economy.

June also saw the historic United States-North Korea summit in Singapore. Markets were initially pleased after the US President and North Korean leader Kim Jong-un signed a denuclearisation agreement, but the lack of detail on the deal left investors cautious, and any positive bounce from the summit was overshadowed by the trade sabre-rattling between Washington and Beijing. The election in Turkey also created further volatility in the financial markets.

US economic growth expected to rebound in second-quarter

US first-quarter economic growth was revised in the Commerce Department’s third estimate to 2%, down from the 2.2% estimated in May, and significantly weaker than the 2.9% annual growth recorded in the final quarter of 2017. But second-quarter economic growth is widely expected to rebound closer to the Trump Administration’s 3% target, on the back of a strong labour market and tax cuts and the flow-through effect of the $US1.5 trillion income tax cut package that came into effect in January. The US unemployment rate, at 3.8%, represented the lowest reading in almost 20 years.

On the US stock market, the Dow Jones industrial Average eased 0.6%, while the broader S&P 500 index gained 0.6%, while the technology-heavy Nasdaq Composite Index appreciated by 0.9%. For the June quarter the Dow Jones gained 0.7%, the S&P 500 added 3.4% and the Nasdaq Composite put on 6.3%.

In Europe, interest rates were left unchanged

The European Central Bank (ECB) said that interest rates were unlikely to rise before the end of next (northern) summer. The ECB also committed to halt its quantitative easing (QE) program in December, after halving its asset purchases from October. The Bank of England also held interest rates steady in June.

As well as the US-China trade war concerns, European markets were also unsettled by a political crisis in Germany, where Chancellor Angela Merkel’s coalition was threatened by differences over migration. Germany’s unemployment rate remained at 5.2%, a record low. Eurozone inflation rose to its highest rate in more than a year, as rising energy prices lifted price growth above the ECB’s target. For the month, the Euro STOXX 600 index weakened by 0.8%, but still managed a 2.4% gain for the quarter, rebounding from a 4.7% loss in the first three months of the year. Germany’s DAX index shed 2.4% for the month while the CAC 40 in France lost 1.4%: for the June quarter, however these same indices were up 1.7% and 3% respectively. In the UK, the FT-100 index lost 0.5% in June, but gained 8.2% over the quarter.

Mixed returns from the Asian market

In Japan, the impetus of the weak yen vied with trade concerns, and while exports growth in May was stronger than expected, early manufacturing surveys indicated that export orders were down in June. The Nikkei was up 0.5% for June and gained 4% for the quarter. However, in China, the Shanghai Composite index dropped 8% for the month and by 10% for the quarter: by late June, the index had officially entered a bear market, down 20% from its January peak.

The Hang Seng index in Hong Kong lost almost 5% in June, to be down 3.8% for the quarter, while the KOSPI in Seoul was down 4% in June and by 4.9% for the quarter.

In Australia, the S&P/ASX 200 index added 3.3% over the month, and gained 8.5% over the June quarter, to end the financial year 13% higher. On the commodities front, West Texas Intermediate (WTI) crude surged 10.7% higher in June, gaining 14.3% for the quarter. The Brent crude grade gained 1.4% in June and 12.3% for the quarter. Gold eased 4.1% in US dollars in June, losing 5.5% for the quarter. Iron ore was barely changed in June, appreciating 1.9% over the quarter. The Australian dollar rose by 0.7% against the greenback, ending June at 74 US cents, to be 2.2% weaker for the June quarter.

Information current as at 30 June 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. Past performance is not a reliable indicator of future performance. 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.

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