The September quarter delivered mixed performance across markets around the world.
The US stock market posted its strongest quarterly performance since 2013, lifting by 7.7%. Eurozone shares showed a much more lukewarm effort increasing by only 1.3%. Japan however, was the stand out with an 8.9% equity market return on the back of a weakening yen.
As for the Australian market, it showed a gain over the quarter in local currency terms, delivering a 1.5% return for the S&P 200, with communications and technology stocks leading the index higher, outweighing a poor quarter from the utilities stocks.
In the US, the economic headlines were dominated by the prospects of a trade war with China, which was kicked off by Washington. This targeted US$34 billion of Chinese goods with a 25% tariff in early July. China responded with tit-for-tat charges on US goods, followed by the US announcing a 10% tariff on an additional US$200 billion of Chinese imports.
August saw talks to revise the North American Free Trade Agreement (NAFTA) ending with a deal between the US and Mexico. A standoff between the US and Canada culminated in the Trump administration threatening to withdraw the US from the World Trade Organization (WTO), claiming it treats his country unfairly.
By the end of the quarter, the Trump administration had announced punitive tariffs on a total of US$250 billion worth of Chinese products – of just under half of the total imported merchandise the US buys from China.
The Americans have left open the possibility of placing tariffs on the entire US$517 billion worth of products that the country imports from China. For its part, China ended the quarter with fresh tariffs of US$110 billion of imports from the US, and reserved its right to take further countermeasures.
US economic data trumps trade fears
While most global markets took fright at the tit-for-tat developments, in the US, investors ultimately chose to focus on improving economic data and company earnings within their own country.
The Commerce Department confirmed in a second report in September that the economy grew at a 4.2% annualised rate in the second quarter: that was the fastest growth in nearly four years, and almost double the 2.2% pace set in the first quarter.
As a result, US company earnings continue to grow strongly, although growth appeared to be moderating by quarter’s end. While both the first (March) and second (June) quarters saw S&P 500 companies posting profit growth rates of about 25% , or near-record rates, third-quarter profit growth was projected at just over 19%, with the fourth-quarter growth rate seen as slowing further, to about 17.3%, and continuing to decline into 2019.
Consumer spending down in the second quarter
However, growth in consumer spending, which accounts for about 70% of US economic activity, was downgraded to a 3.8% rate in the second quarter instead of the previously reported 4% growth. US consumer confidence, however, surged to an 18-year high in August, well ahead of economists’ forecasts.
The US Federal Reserve lifted interest rates in September, for the third time this year, by a quarter of a percentage point, to 2.00%–2.25%. It was the eighth rate hike in the current cycle, which began in 2015, after the rate remained at a record low, near zero, for seven years from late 2008.
US stock market achieves record highs
On the stock market, both the Dow Jones Industrial Average and the broader S&P 500 Index, achieved record highs in September, while the technology-heavy Nasdaq Composite Index touched its all-time high in August.
The Dow Jones put on 9% for the quarter, after its first three-month winning streak since January, while the S&P 500 index gained 7.7% and the Nasdaq Composite rose by 7.1%. The Nasdaq also notched its ninth consecutive quarterly gain.
European stock markets edge ahead
However, European markets found the going a lot tougher.
Concerns continued over the trade hostilities, Brexit negotiations, Italy’s budget (which proposed a deficit higher than expected), currency contagion from the plunging Turkish lira, as well as upcoming elections in Sweden (held in September) and in the German state of Bavaria (mid-October).
On the economic front, Eurozone growth for the second quarter of 2018 was revised up to 0.4% quarter-on-quarter, compared to the initial estimate of 0.3%, for an annual rate of 2.2%.
Germany, the bloc’s largest economy, recorded a better-than-expected 0.5% expansion in the second quarter, driven by consumption and state spending, the Netherlands performed even more strongly (up 0.7%), with both outpacing the UK (up 0.4%) and France (up 0.2%).
The European Central Bank repeated earlier statements that interest rates would remain on hold “at least through the summer of 2019.”
The benchmark Euro STOXX 600 index edged ahead by 1.3% over the quarter, with Germany’s DAX index easing by 0.5% and the CAC 40 in France appreciating by 3.2%. In London, the FT-100 ended 1.7% lower, as fears of a “no-deal” Brexit weighed on investors’ mood and on UK stock prices.
Second-quarter UK gross domestic product (GDP) data showed the economy recovering from its early-year downturn, with quarterly growth rising from 0.2% in the first quarter to 0.4% in the second. This was enough to help the annual rate at the end of the June quarter reach 1.3%, up from 1.2% in the first quarter. However, the 12-month growth rate dipped sharply from the 1.5% struck in May.
Japan surges with a stellar second quarter
In Asia, Japan’s stock market had a stellar second quarter, with the Nikkei index surging 8.9%, as trade tensions vied with a weaker yen, boosting the profits of the country’s exporters.
The re-election of Prime Minister Abe as his party’s leader also helped to calm political concerns. In addition, the Japanese economy outperformed, with a September upgrade finalising second-quarter GDP growth at an annual rate of 3% in the June quarter. This rebounded from a temporary slowdown in the previous quarter, and represented the country’s best growth figure in more than two years.
However, most private-sector economists predict a much lower growth rate for the September quarter, on the back of a spate of natural disasters.
Disappointing quarter for China
In China, economic data largely disappointed over the quarter and central authorities responded with a fresh range of targeted economic support measures, including a shift to fiscal stimulus and credit easing.
Chinese stocks were also hurt by the trade conflict. The Shanghai Composite index gave up 0.9%, taking the 12-month loss for the Chinese gauge to 15.7%. The Hang Seng Index in Hong Kong lost 4% for the quarter. In Korea, the KOSPI index gained 0.7% for the quarter, as the Korean government unveiled a stimulatory budget for 2019, with plans for a 10% increase in government spending.
Australian stock market up but residential property down
Australia’s S&P/ASX 200 total return stock market index gained 1.5%, driven by its Mid-Cap 50 component, which added 3.6%. This was, however, tempered by a 3% loss in the banks sub-index in the wake of the financial services Royal Commission.
According to the CoreLogic September Daily Home Value Index, Australian house prices were down 2.7% since peaking in September 2017: the index lost 1.4% for the quarter, led by the combined capitals, which were down by 1.5%. Melbourne was the worst performer, down 2.4%.
Oil performs well for commodities
In the commodities arena, oil was a strong performer, with the supply outlook continuing to look tight. Buyers reduced purchases of oil from Iran ahead of the US sanctions against the country coming into effect in November.
Brent crude oil was up 5.3% for the quarter, while the US benchmark crude grade, West Texas Intermediate, saw a rise of 4.3%. Iron ore had a robust quarter, up 9.2%, while gold was 4.9% weaker. Comex (New York Commodity Exchange) copper pulled back by 6.2% over the quarter. The Australian dollar eased 2.4% against the US currency over the quarter, closing at 72.24 US cents. The US dollar gained 2.7% against the yen, while the Euro and British pound also lost ground against the greenback, by 0.7% and 0.8% respectively.
 CoreLogic Daily Home Value Index - https://www.corelogic.com.au/research/types-of-indices
Information current as at 30 September 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.
This document has been created by Westpac Financial Services Limited (ABN 20 000 241 127, AFSL 233716). It provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This article is current as at 20 September 2018 and 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.
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, before acting on it.
Past performance is not a reliable indicator of future performance. © Westpac Financial Services Limited 2018