Read: The climate for Fixed Income in 2018
Read: Reporting period wrap – earnings trending higher
After a very robust start to the year, risk assets, particularly global equities, were sold off sharply in early February, with the subsequent rebound not able to regain all the lost ground.
The catalyst was the January U.S. employment report, that highlighted a sharper than expected increase in U.S. wage growth. Whilst this was a positive sign from a fundamental economic perspective, investor sentiment soured as many were forced to swiftly recalibrate their future expectations of U.S. inflation and by extension, interest rate rises - having previously priced in a far more benign / disinflationary environment. The reaction was to some extent, savage, and caused volatility to peak at levels not seen for the last 2.5 years - exacerbated by some forced deleveraging from the hedge fund sector and the collapse of a few high profile volatility products listed offshore.
In global equities, the S&P500 fell 3.9% but has still delivered a positive return for the calendar year. All the other major regions fell in a similar manner in local currency terms. The $A weakened against the $US over the month, closing at $0.7762. Australian investors who held unhedged investments benefitted from the cushioning effect of the weaker $A.
The Australian equity market bucked the global trend, with the S&P/ASX 200 Acc Index rising 0.4%. Economic releases were generally positive on balance, including signs that Australian wage growth may finally be inflecting upwards. The key focus for equity investors (aside from the broader volatility!) was the interim reporting season, the key highlights we discuss further in this note.
The fixed income markets took the full force of the volatility, with the U.S. 10Yr Bond selling off to a high of 2.95% mid-month, before closing at 2.86%, as investors priced in a greater velocity of interest rate rises by the Federal Reserve, which officially welcomed former Investment Banker, Jerome Powell, as its new Chairman earlier in the month.
The Australian 10yr Bond also experienced some volatility but closed the month fractionally lower than when it started at 2.78%, assisting the Bloomberg AusBond Index (all maturities) to post a 0.29% gain for the month.
With investors concerned over rising interest rates, many bond proxy sectors, including listed REITS, were sold off over February. Our preferred global listed property index fell 6.3% in local currency terms while A-REITS (S&P/ASX 200 A-REIT Index) fell 3.3%.