A recent update on markets
Global share markets fell sharply in October. This was on the back of some stronger-than-expected economic data in the US, which prompted investors to worry that interest rates there may need to rise faster. Ongoing trade tensions and the upcoming mid-term elections in the US have also been hanging over markets.
Technology and some consumer-related companies bore the brunt of the heavy selling. While shares have given back most of their gains from earlier in the year, it’s important to remember that the world’s share markets have enjoyed a record-breaking run, with many markets touching record highs as recently as September. Find out more here.
For the three months ending September 2018
Global share markets had a strong quarter, boosted by takeover activity and robust company earnings. This helped the MSCI World Index to finish 4.2% higher in local currency terms.
Markets shrug off global trade tensions
There were some concerns around trade tensions between the US and China. However, markets took comfort from strong corporate earnings announcements, as most US companies continued to benefit from the wide-sweeping tax cuts passed by the Trump administration early this year.
US shares were among the better performers. The S&P 500 Index (up 7.2%) hit a record high, and delivered a record-breaking streak which has lasted for almost a decade. Technology stocks were especially strong, as index heavyweight Apple passed the $1 trillion level in terms of market capitalisation – the first company to achieve this.
European and UK shares were among the weaker performers this month. With less than six months to go, ‘Brexit’ uncertainties held back the returns from these markets.
Bonds weaker given higher US interest rates
In economic data, US inflation is on the up, driven by a tight labour market and robust economic growth. It prompted the US Federal Reserve to raise interest rates again, to a target range of 2 to 2.25%. It’s the eighth increase in US interest rates since they began to return interest rates to more normal levels following a period of monetary stimulus that has been in place since the global financial crisis.
Typically, bond markets struggle when interest rates rise, so against this backdrop most major global bond markets fell in value.
New Zealand market
New Zealand shares also broke new ground, as the NZX 50 Index rose 4.6% and a number of companies saw their shares either trading at, or close to, record levels. The New Zealand listed property market was another solid performer, up 5.9%. Strong investor demand and exceptionally low vacancy rates have underpinned the performance of this market.
Mixed signals from the economy
From an economics perspective, a key focus was on the future path of interest rates. While business confidence hit a 10-year low, there was a surprise pick-up in economic activity in the second quarter, with GDP (Gross Domestic Product) growth a stronger-than-expected 1.0%, an annual rate of 2.7%.
Against this backdrop, the Reserve Bank of New Zealand left domestic interest rates on hold at a record low level of 1.75%. The RBNZ pushed out the timing of its next interest rate increase to late in 2020, but reiterated that its next move could be either up or down.
With interest rates on hold, bonds gain but currency falls
With New Zealand interest rates looking as though they’ll stay on hold for longer, local bond markets rose in value. What’s more, strong demand and a lack of supply of new bonds continued to support the bond market.
The New Zealand dollar was weak on a trade-weighted basis, down 0.4%. Downbeat economic data, weak business confidence and the fact that US interest rates are now higher than New Zealand rates all worked against it.