The Australian share market finished the financial year on a strong note posting a healthy gain of 3%, outperforming most other global markets during June. For the financial year the local market recorded a gain of 13% including dividends. It appears that the weaker local currency prompted renewed foreign interest in our market. The AUD fell 2.2% against the USD based on a widening interest rate differential following a 25bp hike in the Fed funds rate and concerns about the health of the Chinese economy. Commentary by the RBA has further pushed out expectations for a hike in interest rates to the end of 2019. The energy sector was the stand-out, advancing 7.7% boosted by the sharp 10.6% rise in the crude oil price.
Overseas markets were mixed as concerns about the potential onset of a global trade war elevated volatility and risk aversion. The VIX index which is a barometer of market volatility, rose 19% for the month. The US scratched out a small 0.5% gain, as did Japan, while Europe was 0.9% lower on concerns that the pace of growth has recently slowed. The headline story for the month however was the sharp decline in the Chinese share market with Shanghai off 8% and Hong Kong down 5% based on concerns on the state of the Chinese economy and the potential for the adverse impact of US tariffs on their export sector.
Bond markets were fairly subdued with the US yield curve flattening as 2-year treasuries rose 10bp to 2.53%, while 10-year notes were flat at 2.86%. Australian bonds fell across the curve with 10-year bonds 4bp lower to 2.63% and 3-year bonds 3bp lower at 2.06%. The spread between the US and Australian 10-year bond yields is now the highest recorded this century reflecting the divergence in monetary policy settings between the two countries, a harbinger for future AUD weakness.