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Market and economic overview
AUD and commodities
The Australian dollar (AUD) depreciated by 1.9% against the US dollar (USD) in July ending the month at $USO.8963. This was the fourth consecutive month that the AUD had lost ground against the ‘green back’, falling below $USO.90 for the first time since August 2010.
The AUD plunged by 1.6% after RBA Governor Stevens told market participants that further monetary policy easing is likely in his speech on 30 July 2013.
Commodity prices continued to recover, led by Oil (+8.8%) which recorded its largest monthly gain since August 2012, supported by improving European economic data which pointed to rising demand and the closure of most oil terminals in Libya. Gold (+7.3%) reversed its recent losing streak amid evidence of falling scrap supply. Iron ore (+11.5%) prices were pushed to a peak of $US132.10 per metric ton on Chinese re-stocking.
The Australian share market commenced the new financial year strongly, posting its best July monthly performance since 2009.
Some more clarity around a possible start to the ‘tapering’ of the US bond purchase program helped support the Australian bond market in July, which was a factor in helping the Banking (+6.1%) sector on the month.
REITs (-0.8%) and other defensive sectors such as consumer staples (+1.1%), telecommunications (+4.6%) and utilities (+2.7%) lagged performance-wise in July.
Australian listed property securities (the S&P/ASX200 A-REIT Accumulation Index) dipped by 0.8% in July, under performing the broader Australian equity market.
A-REIT valuations have become more attractive in the wake of recent market volatility. A-REIT balance sheets, already healthy, were bolstered by a series of capital raising’s in early May. The low interest rate environment in Australia is expected to persist, which is likely to remain supportive of share prices in the medium term.
Listed property markets offshore rose during July. Overall, the UBS Global Property Investors index (local currency) increased by 0.8%. The UK (+8.1%) was the strongest-performing region, followed by Continental Europe (+3.4%).
In the US, the S&P500 Index climbed by 4.9% in July, propelled higher by the health care (+7.1%) and banking (+5.3%) sectors, which be benefited from better than expected June quarter earnings results. The materials (+5.5%) sector also responded to a calming of Chinese economic concerns.
Defensive sectors under performed during the month, with telecommunications (-0.7%), consumer staples (+3.9%) and utilities (+4.2%) the laggards.
Despite lingering concerns over negative credit growth, high unemployment, stagnating economic growth in the Euro-periphery and the unlikely prospect of political reform, tail risks have receded in the Euro zone.
In Japan, the Nikkei 225 and Topix Indices fell by 0.1% and 0.2%, respectively. The market surged by almost 9% in the lead-up to the upper house election on 21 July, only to see these gains wiped-out after the result confirmed that Prime Minister Abe regained full control of the parliament, which was widely expected. The “post-election blues” weighed on the energy, telecommunications and industrial sectors.
Indonesia (-4.3%) was the poorest regional performer as concerns increased that the weakening Rupiah and slowing growth would erode earnings and returns.
Global emerging markets
Recent heightened volatility in emerging market (EM) assets subsided in July.
The MSCI Emerging Markets EMEA Index increased by 2.4% in USD terms (+4.2% in AUD terms) over the month.
At a sector level, consumer discretionary (+7.9%) and energy (+6.2%) were the two best performing sectors in July.
Brazilian (+1.6%) shares remained under pressure due to rising political risks. Popular support for the Dilma government has plummeted amid a failure to deliver political reforms amid rising social unrest.
The stabilization in US Treasury bond yields meant that EM bond yields were more subdued last month.
Overall, the 10-year US Treasury yields finished the month 9 bps higher at 2.58%, while 10-year UK Gilt and 10-year German Bond yields declined over the month (by 8 bps and 6 bps, respectively).
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