Most other developed markets also improved with the UK up 1.3%, Germany 1.9% and Japan 3% higher. After a horror month in July, the Chinese market stabilised to finish relatively flat for the month.
Bond markets were subdued with the US 10-year treasury note rising by just 9 basis points to finish at 1.3% while our 10-year bond was slightly firmer to finish at 1.15% The Australian dollar stabilised from its recent weakness to finish marginally lower against the greenback closing at $US 73.2.
Market tail winds moderating
The Australian economy unexpectedly posted a healthy 0.7% improvement in the June quarter, somewhat better than expected. The market tended to ignore this however as it reflected the period prior to the hard lockdowns in Victoria and NSW that will heavily impact the September quarter national accounts which could show a contraction of up to 4%. The RBA’s most recent statement struck a relatively dovish tone stating they will maintain very easy policy settings until the economy is on a self-sustaining recovery path. They remain optimistic that once 70-80% vaccination targets are reached, then the economy will rebound strongly by mid-2022 as most restrictions are removed. In somewhat of a surprise, they did confirm they would begin to taper their weekly bond purchases from $5 billion to $4 billion a week from September until February 2022.
While the Australian profit reporting season for the second half of FY 21 slightly exceeded expectations in aggregate, the negative revisions to next year’s earnings puts a slight dampener on the outlook as it follows on from 11 consecutive months of positive revisions, which has been a consistent driver of market returns.
The slowdown in the Chinese economy saw them cut back steel production which was the catalyst for the iron ore price decline. There is also increasing focus on the leverage in their economy particularly in the property sector which is causing some financial stress to property lenders. In the US, inflation continues to be of some concern with short term consumer and producer prices printing on the strong side. The Fed maintains these effects are transitory and related to supply shortages rather than of a structural nature, however the market is becoming increasingly sceptical about this position. The tone from their annual Jackson Hole conference was somewhat dovish with the market relieved that their taper of bond purchases (currently running at $120 billion per month) is unlikely to commence until December this year.
Strategy and Outlook
Equity markets have provided exception performance so far this year on the back of the powerful combination of an expanding money supply, very cheap credit and profit growth driven by post-pandemic economy recovery. While the medium-term outlook for equities remains positive, there are a couple of cautionary signs that cannot be ignored. Firstly, the inevitable tapering of bond purchases by central banks will take some of the wind out of the monetary stimulus sails, even though increases in interest rates are still some way off. Secondly, the slowing Chinese economy together with the impact of the delta-variant across western economies has seen a slowing of economic growth leading to a decline in commodity prices and a negative revision to profit expectations. So, for diversified balanced and growth portfolios that have drifted to an overweight position in international equities, we have decided to take some profits and trim these positions back to our target weighting.