US-China trade war
Tariffs and other forms of trade war continued during the June 2019 quarter. Negotiations between the US and China broke down after Chinese negotiators retractedcommitments they made in previous negotiations. This led to both countries placing further tariffs on each other’s goods and the use of non-tariff trade war tools. As an example of these tools, the US Government limited what business US companies could do with the Chinese communications firm, Huawei. This restriction has reduced the sales and competitiveness of Huawei products. Towards the end of the quarter the US and China agreed to resume talks and halt any further escalation.
The Markit Global Manufacturing PMI (a measure of manufacturing activity globally) slipped to its lowest level since 2012.
Previously, strong US economic growth supported global manufacturing activity overall but with a slowdown in the US, coupled with weakness in Europe and China, a fall in global manufacturing is expected.
Bonds and shares rally
In global markets, bonds and shares rallied during the June quarter. Key to bond returns were interest rate cuts by a number of central banks because of slower economic activity. The Reserve Bank of Australia (RBA) also reduced the cash rate by 0.25%, which caused Australian yields to fall substantially (around 0.4% or more) which supported bond prices during the quarter.
In Australia, there was some disappointing economic data. March 19 quarter inflation and economic growth were both weaker than expected and the unemployment rate rose to 5.2%. The RBA cut interest rates, based on this economic data and its own assessments on the target unemployment rate. In early June the RBA cash was cut by 0.25% to 1.25%, the first change since August 2016. This was followed by a further 0.25% cut in early July, leaving the cash rate at 1%. Survey data on both consumers and businesses, such as the May and June NAB Business Surveys, which measure business conditions such as profitability and overall confidence, highlighted a more subdued consumer demand environment . Retail sector conditions remaining the weakest of the industries surveyed
A bright spot for some segments of the economy was the Federal election win by the Coalition party. This ended the prospect of perceived ‘anti-property’ policies from the Labor party and saw a rise in sentiment in property markets. However, the drop in consumer confidence in the June Westpac - Melbourne Institute Index of Consumer Sentiment (a full month after the election) casts some doubt on the sustainabiltiy of this positive sentiment. The outlook is for weaker, but still positive, Australian economic growth.
Share markets were volatile. The Australian sharemarket outperformed global shares during the quarter. The Coalition election win was positively received by Australian share market investors as it ended the threat of a number of Labor policies including ending dividend imputation credit refunds for some retirees. Shares exposed to the property markets such as REA Group and Domain, both online property sale platforms, rallied strongly on the rise in sentiment. Global shares rose overall, supported by the easing monetary policy outlook. There was some selling pressure during May when the trade war escalation weighed on sentiment but this fear abated when the US and China agreed to another truce in their trade war. Bond proxies (income-producing stocks such as infrastructure and REITs) benefited from falling bond yields globally as investors sought out other income-producing alternatives.
The Australian dollar fell as a result of a weaker global growth outlook which outweighed strong iron ore prices.