The September Market Update reveals a dynamic month across global financial markets, driven by significant policy changes and economic developments. As inflation moderates and central banks adopt more supportive monetary policies, global equity markets have reached new heights. Below, we break down the September Market Update and explore key highlights from the month:
Key Highlights from the September Market Update
The Australian share market reached all-time highs during September.
The US Federal Reserve cut interest rates by 50 basis points.
China announced major monetary and fiscal policy stimulus packages.
Chinese shares surged, with the Shanghai Composite Index rallying 21%.
Selected Market Returns (%), September 2024
Financial Markets
A Strong End to the Third Quarter
The MSCI World Index (USD) reached all-time highs in September closing the month 1.87% higher, while returns were flat in Australian dollar terms due to a 2.25% appreciation in the AUD/USD exchange rate. A significant 50 basis point interest rate cut by the US Federal Reserve (Fed) and a blitz of fiscal and monetary policy stimulus by Chinese authorities lifted global equity markets.
Australian Equities
The S&P/ASX All Ordinaries rose by 3.45% reaching new highs and posting the best September quarter since 2013. Small caps outperformed with the S&P/ASX Small Ordinaries gaining 5.06%. The Materials sector led the gains, rising by 13% buoyed by Chinese stimulus measures that ignited a rotation from Financials to Materials. The Information Technology sector also had a strong month rising by 7.36% followed by Real Estate which ended 6.6% higher. Defensive sectors were the weakest with Healthcare and Consumer Staples falling by 3.2% and 1.7% respectively.
Global Equities
US equity markets hit all-time highs, benefitting from an aggressive start of the Fed rate cutting cycle, easing in inflation, and resilient economic data. The S&P 500 (USD) and Nasdaq (USD) gained 2.14% and 2.68%, respectively, while the small-cap Russell 2000 underperformed, rising just 0.56%.
Interest rate sensitive sectors showed strong gains adding further to their robust quarterly performances. The Consumer Discretionary sector was the best performer rising by 7.09%. This was followed by Utilities which gained 6.6% in the month and closed off the quarter as the strongest performing sector. Energy continued to underperform, falling by 2.7% following weaker global energy prices. Healthcare and Financials also lagged ending lower for the month.
Chinese authorities unveiled the most aggressive economic stimulus package since the Pandemic, driving a significant rerating in Chinese shares. The Hang Seng (HKD) rallied by 17.5% and the Shanghai Composite (CNY) surged 21.1%. European markets were mixed but sectors exposed to Chinese economic activity such as luxury goods, performed well. Germany, as a significant trading partner to China, also saw strong gains with the DAX (EUR) gaining 2.2%, reaching all-time highs. The Nikkei (YEN) fell 1.2% as the Japanese market continued to experience heightened volatility in the face of an unexpected election result and mixed economic data.
Commodities
Commodities rallied, driven by expectations of increased demand following US rate cuts and Chinese stimulus. Copper and iron ore gained 12.9% and 8.4% respectively. Precious metals also rallied supported by further Middle Eastern geopolitical tensions. Gold, once again, traded at all-time highs, rising by 6.2% to close at $2685 an ounce. In contrast, crude oil dropped 7.7% to $72 per barrel due to soft demand and excess supply concerns.
Bond Markets
With little change in the Australian interest rate outlook and inflation data matching expectations, the Australian 10-year bond yield remained unchanged in September at 3.98%. In the US bond market, a larger than expected interest rate cut, coupled with expectations for two further rate cuts by year-end, helped push yields lower with the US benchmark 10-year yield falling 13 basis points to close at 3.79%.
Economic Developments
The Reserve Bank of Australia Remains on Hold as Inflation Trends Lower
The Reserve Bank of Australia (RBA) held the cash rate steady at 4.35%, as expected, and retained its hawkish stance. Governor Bullock reiterated that the RBA did not see interest rate cuts in the near term but, in what seemed a dovish tilt, the Board was not explicitly considering a rate hike. Inflation continues to concern the RBA despite monthly CPI falling as expected to 2.7% year-on-year, down from 3.5%. This large drop was largely attributed to the effects of temporary government electricity subsidies, although excluding these the overall disinflationary trend is still intact.
Second-quarter GDP data showed a 1% annual growth rate, the slowest pace since the 1990s (excluding the pandemic period). Within this report, consumer indicators were weaker across spending, saving and income metrics. Labour market conditions remained stable, with the unemployment rate steady at 4.2% and job growth of 47,000 exceeding expectations. The participation rate remained elevated at 67.1%.
The US Fed Delivers an Outsized Interest Rate Cut
The US Federal Reserve initiated its easing cycle with a 50 basis point cut to the Fed Funds rate, larger than the 25 basis points anticipated by economists, but largely in line with market pricing. Markets are currently pricing in a 50% probability of 75 basis points worth of cuts by the end of the year, but Fed Chair Powell indicated that two cuts of 25 basis points is the most likely trajectory. This move has been in response to continuing moderation in inflation further evidenced by August CPI which dipped as expected to 2.5% year on year from 2.9%. The Fed’s preferred gauge of inflation, Core PCE, remained unchanged at 2.8% year-on-year.
Weakness in the labour market has also provided some justification for the Fed’s actions as it becomes increasingly cognizant of weakening economic growth. Nonfarm payrolls were revised lower, and August numbers showed a lower than expected increase. Payroll growth is now tracking at close to a four-year low. However, GDP data was resilient showing the US economy grew by an annualised 3% for the second quarter, ahead of the 2.9% expected. Broadly, September economic data releases provided a mixed picture of US economic activity.
China Unveils Aggressive Stimulus Amid Weak Economic Data
Chinese economic data weakened further in September, with lower-than-expected retail sales, industrial production, and Purchasing Manager (PMI) figures. Further demand weakness was reflected in lower than expected inflation data with CPI rising by 0.6% year on year. House prices continued to fall with August data indicating prices fell by 5.3% year on year. Additionally, the unemployment rate rose unexpectedly to 5.3% from 5.2%.
Chinese authorities announced a comprehensive stimulus package aimed at reviving economic growth and stabilising the property market. The package included cuts to the policy rate, mortgage rates and bank's reserve requirement ratio. Downpayments for second home purchases were also reduced to historic lows of 15%. Several equity market support measures were also introduced providing funding to both financial institutions to purchase stocks and to listed companies to facilitate share buybacks. Additionally, the Politburo pledged to deploy fiscal spending to meet their 5% economic growth target.
Outlook
Many global markets are trading close to all-time highs supported by several factors that have combined to buoy investor sentiment. Moderating inflation and resilient economic growth occurring at the same time as global central banks embark on the early stages of monetary policy easing provides a supportive backdrop for financial markets and a soft economic landing.
There are risks though that can shift the growth outlook. Weakening labour markets and softening consumer trends are increasing the probability that major economies could enter a recession. These concerns are recognised by governments and central banks who are actively attempting to support economies through decisive policy actions.
Given the current market dynamics, a balanced approach to portfolio management is crucial. Maintaining a diversified portfolio that considers both risks and potential returns will help navigate the evolving economic landscape effectively.
Major Market Indicators
As we continue to monitor these developments, it's important to consider how they may impact your financial plans. Whether you want to adjust your strategy or stay informed, we're here to help. Contact us here for a personalised consultation and stay ahead of the curve.
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