SOLACE Financial Investment & Economic Snapshot

financial Investment & Economic Snapshot

Key market and macroeconomic developments FY 2023/2024

Jul 2023The US Federal Reserve (Fed) increased rates by a further 25 basis points, citing concerns about inflation and tight labour markets for its decision. US and Australian Government bond yields rose throughout the month. Global financial markets improved, with most major financial assets generating solid returns for the second consecutive month. Asian markets, led by Chinese equities, were particularly strong. US stocks also performed well due to better-than-expected earnings results, fostering investor optimism for a soft landing of the economy.
Aug 2023Central banks around the globe met at Jackson Hole during August. Although they acknowledged inflation is slowing, the key takeaway was that further hiking may be necessary and interest rates are most likely to be higher for longer. Additionally, the absence of substantial Chinese stimulus to support their slowing domestic economy added to investor concerns. Fitch, an independent credit rating agency, caused a stir by downgrading the US credit rating one notch to AA+ from AAA. Fitch cited expected fiscal deterioration over the next three years as well as a high and growing general government debt burden as reasons for the downgrade.
Sep 2023September’s reputation for being a poor month for markets came to bear, leading to a widespread sell off across asset classes. The Fed held the funds rate steady and made only minor changes to its policy statement. However, significant shifts in economic and interest rate projections, suggesting a “higher (interest rates) for longer” outlook, rattled markets, as investors grew cautious. Meanwhile, the Reserve Bank of Australia (RBA), under new Governor Michele Bullock, opted to keep interest rates unchanged, expressing concerns about persistent inflation and acknowledging economic uncertainty. Oil prices rose another 8.6% in September to finish 28.5% higher for the quarter.
Oct 2023The market downturn continued, as strong US economic data led to higher global bond yields, with the US 10 year bond yield reaching 5% during the month. Both stocks and bonds extended their losses for a third month in a row. Hamas launched a surprise attack on Israel, escalating into war. Gold and the US dollar were the best-performing asset classes.
Nov 2023A shift in interest rate expectations towards rate cuts in 2024 propelled both stocks and bonds higher, bringing the recent correction to an end. Australian stocks bounced 5.19%, while US stocks surged 9.13% higher in USD terms. Although stocks and bonds enjoyed a strong positive month, global manufacturing surveys deteriorated further, suggesting a meaningful economic recovery is not around the corner.

The RBA lifted the cash rate by 25 basis points to a 12-year high of 4.35%. Governor Michele Bullock’s post meeting speech underscored that although inflation is moderating, it remains too high and is more persistent than anticipated. The statement left open the possibility of another rate increase.
Dec 2023Financial markets ended 2023 on a high, with stocks and bonds extending their gains from November on easing inflation fears and expectations that the US may avoid a recession. Investor sentiment received a further boost when the Fed Reserve Chair, Jerome Powell, made comments that they believe US rates are at or near the peak in the current cycle. While many stock markets ended the year with strong returns, the US market proved to be the key driver of global returns during 2023, with AI themed stocks such as NVIDIA having an outsized impact on the performance of US stocks. The Australian market lagged the US market given its significant exposure to cyclical sectors such as banks and resources where earnings are significantly weaker compared to technology and consumer discretionary sectors in the US.
Jan 2024The stock market recovery that began in November 2023 consolidated in January as the Fed pushed back on optimistic rate cut expectations that were priced into markets. This saw bonds and interest rate sensitive sectors, like property and infrastructure, experience weakness, while the broader Australian and US equity markets enjoyed modest gains. Japanese stocks were among the best performing asset classes finishing 8.4% higher, driven by strong buying interest from foreign investors, taking advantage of a weaker Japanese Yen. In Australia, inflation came in lower than expected, but retail sales dipped.
Feb 2024Fuelled by strong earnings and anticipation of rate cuts, global stock markets surged to record highs. China, buoyed by government intervention, also saw a significant market rebound. The RBA maintained the cash rate at 4.35% with Governor Bullock indicating inflation was still too high and this was backed up by data released later in the month showing rent inflation and food inflation still elevated. In the US, strong jobs data clashed with surprising inflation figures, prompting the Fed to hint at a potential delay in rate cuts.
March 2024After a strong start to the year, stocks and bonds experienced a pullback when inflation data surprised on the upside in Australia and the US. This led markets to push out the timing of rate cuts, negatively impacting equity market sentiment. Geopolitical tensions flared again after Iran’s missile attack on Israel, pushing gold to new all-time highs. Volatility in commodity markets continued with copper rising 13% and oil rebounding 15.8% following months of weakness.
April 2024After a strong start to the year, stocks and bonds experienced a pullback when inflation data surprised on the upside in Australia and the US. This led markets to push out the timing of rate cuts, negatively impacting equity market sentiment. Geopolitical tensions flared again after Iran’s missile attack on Israel, pushing gold to new all-time highs. Volatility in commodity markets continued with copper rising 13% and oil rebounding 15.8% following months of weakness.
May 2024Global markets rebounded in May, led by the US, up almost 5%. Chipmaker NVIDIA experienced gains of 25.5% following strong earnings which beat expectations. The Australian stock market posted modest gains of 0.87%. The RBA held the cash rate steady at 4.35% but communicated a more cautious outlook following higher than expected inflation data from April. In the US, the Fed calmed markets by reiterating that the next interest rate move would not be a hike. In China, the government announced a US $240 billion rescue package to support the property sector which has been a significant drag on the economy.
June 2024Global stocks grinded higher in June, led by the US and in particular technology stocks. Investors breathed a sigh of relief as US inflation data matched expectations. The European Central Bank reduced interest rates by 0.25%. Global markets started to consider the impact that upcoming elections in the US, UK, and France may have on economies.

Selected market returns FY 2023/2024

Selected market returns FY2023-2024

The year in review

Inflation and the timing of future rate cuts was a major source of volatility throughout the 2024 financial year. The last interest rate increase in the US was in July 2023, while in Australia the last increase was in November 2023. As we entered the 2024 calendar year, there were expectations of up to six interest rate cuts in the US. However, inflation has remained stickier than expected and, as the year progresses, there are now question marks if there will be any interest rate cuts this calendar year. The RBA, on the other hand, is still considering whether one more rate hike is required. 

Global equity markets performed well throughout the 2024 financial year, with the US leading the way. The Magnificent Seven stocks dominated the headlines and drove the majority of the US market performance. NVIDIA was the dominant company as it benefited from the boom in AI and briefly become the largest company in the world with a market capitalisation exceeding $3 trillion.

Despite cost-of-living pressures and higher interest rates, the Australian economy has been resilient. However, data shows that without the impact of strong net migration, Australia would have entered into a recession this year. Both major political parties have stated that they do not intend to keep migration at these elevated levels, which suggests a challenging outlook for economic growth in the near future. The Australian share market returns have been dominated by the Big 4 banks, Goodman Group, and a small number of technology stocks. The lack of earnings growth and consistent rise in the share prices of the Big 4 banks has left them trading at historically high valuations.

Despite ongoing economic challenges in China, investor sentiment has stabilised as investors welcome economic stimulus and policy from Chinese authorities. The People’s Bank of China has cut the 5-year lending rate, a key reference rate for mortgages. China presents an attractive investment opportunity due to supportive government policies, recent interest rate cuts and cheap valuations relative to developed market stocks. 

Outlook

Inflation in the US and Australia is falling at a slower rate than expected which has delayed interest rate cuts. With the uncertainty around interest rate movements and a slowing economy, the importance of portfolio diversification and active risk management is crucial in navigating the unpredictable financial landscape. By prudently managing risks and being prepared for various market scenarios, investment portfolios can weather challenges and take advantage of opportunities that may lie ahead.

Major market indicators

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30-Jun-2431-May-2430-Apr-24Qtr change1 year change
Interest Rates
(at close of period)
Aus 90 day Bank Bills4.39%4.36%4.37%+4.0+14.0
Aus 10 yr Bond4.41%4.33%4.27%+36.5+49.4
US 90 day T Bill5.22%5.25%5.25%-1.0+5.0
US 10 yr Bond4.37%4.49%4.68%+16.5+56.2
Currency
(against the AUD)
US Dollar0.6680.6650.6492.37%0.33%
British Pound0.5240.5220.5211.41%-0.11%
Euro0.6200.6130.6102.67%1.59%
Japanese Yen107.32104.63102.108.76%11.68%
Trade-Weighted Index63.3063.1062.202.93%2.59%
Equity Markets
Australian All Ordinaries0.7%0.9%-2.7%-1.2%12.5%
MSCI Australia Value (AUD)0.9%1.0%-2.9%-1.0%14.0%
MSCI Australia Growth (AUD)3.3%1.2%-3.9%0.5%15.7%
S&P 500 (USD)3.6%5.0%-4.1%4.3%24.6%
MSCI US Value (USD)0.0%2.9%-4.2%-1.4%15.0%
MSCI US Growth (USD)6.9%6.6%-4.0%9.4%34.1%
MSCI World (USD)2.1%4.5%-3.7%2.8%20.8%
Nikkei (YEN)3.0%0.2%-4.9%-1.8%21.5%
CSI 300 (CNY)-2.5%-0.5%2.0%-1.0%-7.7%
FTSE 100 (GBP)-1.1%2.1%2.7%3.7%12.8%
DAX (EUR)-1.4%3.2%-3.0%-1.4%12.9%
Euro 100 (EUR)-2.8%3.2%-0.8%-0.6%11.7%
MSCI Emerging Markets (USD)4.0%0.6%0.5%5.1%13.0%
Commodities
Iron Ore (USD)-9.0%-0.9%15.8%-9.8%-7.0%
Crude Oil WTI U$/BBL6.2%-6.6%-0.6%-0.8%17.3%
Gold Bullion $/t oz-0.2%1.5%3.7%1.3%21.4%
*For cash rates and bonds, the changes are % differences; for the rest of the table % changes are used.
Solace Financial is the trading name of the entities that are Authorised Representatives of SFDS Pty Ltd (AFSL 509493). This website contains general advice which does not consider your particular circumstances. You should seek advice from Solace Financial who can consider if the strategies and products are right for you.

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