In October a rise in bond yields, coupled with a rising US dollar and waning impacts of the Chinese stimulus in September saw growth assets generally fall with bonds also producing negative returns.

In September, the US Federal Reserve cut the US Fed Funds rate by 0.5% to 4.75-5.00%. US inflation appears to be under control with August data revealing US inflation at an annualised rate of 2.5% p.a. much lower than the 9% p.a. peak seen in 2022. US employment whilst resilient has softened, justifying a more accommodative monetary policy stance. The European Central Bank also cut rates in the month by 25bps to 3.50% following on from their previous 25bps cut in June due to falling inflation and slower economic growth.

In early August markets were volatile as almost simultaneously the Bank of Japan hiked interest rates at the same time as US employment data was released showing that payrolls softened. This led to the Japanese currency strengthening versus the US Dollar which in turn saw Japanese equity markets fall by over 20% in a day and US technology stocks sell off as the unwinding of the infamous “carry trade” occurred. However, by month end markets were little changed as fears of a massive unwinding of the carry trade dissipated.

Australian markets were influenced in July by a slight softening in inflation data that saw bond markets go from pricing in a potential rate hike at the next RBA meeting (5th - 6th August) to a potential rate cut by February. This lifted Australian equites to new highs and also saw bond yields fall (prices increase).

In June US inflation for the year to May was released with the annual rate of inflation falling to 3.3% (down from 3.4% the previous month) which is still much higher than the US Federal Reserve’s targeted 2% inflation rate. US bond yields responded favourably to the improved inflation data over the month.

In May US inflation for the year to April was released with the annual rate of inflation falling to 3.4% (down from 3.5% the previous month) which is still much higher than the US Federal Reserve’s targeted 2% inflation rate. Despite the higher inflation print bond yields, or to put it another way, the expected future cash rates fell assisting US equity valuations.

In April equity markets reflected a change to valuations as the likelihood of cash rate cuts in 2024 lessened and investors began to factor in a “higher for longer” interest rate backdrop. Broadly speaking international and Australian equity markets were weaker by around 3% and Australian Real Estate Investment Trusts (AREITs) after rising by 10% in March sold off by 8% in April, reflecting the higher for longer bond rate thematic.

In March equities moved higher and many markets continued making new all-time highs as bond yields fell slightly driven by the further expectation that central bank rate cuts are due to occur in 2024. However, the Bank of England, the European Central Bank and the US Federal Reserve are yet to cut rates after their recent tightening cycles.

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Australians trying to break into the property market today face their fair share of challenges. Property prices have risen at a much quicker pace than incomes, and the high cost of living can make saving a deposit seem next to impossible.

In February as per in January the US and Australian equity markets continued to move higher and achieve further new all-time highs. During the month US inflation fell to 3.1% annually from 3.4% driven by a decline in petrol prices. Offsetting lower petrol prices were higher housing and food costs. It’s worth noting that Core Inflation (which excludes volatile items such as food and energy) was flat at 3.9% annually. Australian inflation was reported late in February and came in at 3.4% annually, the same level as the prior month. The conclusion from these data prints is that whilst inflation is to a degree contained, there’s still a way to go before inflation is back between 2-3%. Longer dated bond yields rose in the month reflecting this dynamic.

In January the US and Australian equity markets achieved new all-time highs delivering returns for the 12 months to 31st January in their local currencies of 20% and 7% respectively. US equities were lifted by the strength of the “Magnificent 7” labelled stocks being Microsoft, Meta Platforms, Tesla, Apple, Alphabet, Amazon, and NVIDIA. The rally in equities was driven by cooling inflation coupled with the expectation that a hard landing, i.e. a recession, will be avoided and that cash rate reductions will start to occur soon. Therefore, risks to equity returns going forward have lessened. Bond yields didn’t move significantly in January noting that in December yields fell significantly reflecting the future potential cash rate reductions due in 2024 and 2025.

In December bond yields continued their retreat (prices increased) which in-turn caused growth asset prices to also increase further. This rapid change in direction of bond yields over the last two months has helped to deliver a 5% return in passive fixed income investments for the year and has also seen strong gains from growth assets with Australian equities up ~12% and International equities (both currency hedged and unhedged) up over 20% in the last 12 months.

November saw a large reduction in bond yields as the market took a better-than-expected US inflation print to conclude that the US Federal Reserve has beaten inflation, are done with further rate hikes and that a pivot (cash rate cuts) are on the cards for early 2024. The result of this change in belief saw a rally in growth assets, in particular bond proxies such as listed real estate and infrastructure, and the US Dollar weakened.

October was marred by the start of the Israel-Gaza conflict with the devastating and continuing loss of lives for those in and around the conflict zone. This conflict currently shows no signs of abating and coupled with the ongoing Russia/Ukraine conflict, is impacting investors’ confidence with investors finding haven in assets such as the US Dollar and gold with the latter briefly rising above the key US$2,000/oz level.

The historic dispute of middle eastern territories between Israel and the State of Palestine became destructive on October 7th as the Palestinian militant group, Hamas, launched what has been labelled as a “terrorist attack” on Israel resulting in more than 1,400 Israelis being killed. In addition, Hamas took an estimated 230 Israeli soldiers and civilians hostage. Not surprisingly, an ongoing military retaliation against Hamas has ensued mainly involving air strikes against Hamas targets. The situation has been further complicated by the involvement of Lebanese Shia Islamist political party and militant group, Hezbollah. Both Hamas and Hezbollah are funded by Iran which has incentivized the U.S. to send troops to the region in a show of support for Israel and the US has been involved in bombings of facilities used by Iran’s Islamic Revolutionary Guards Corps and other Iranian proxies in neighboring Syria.

De-inversion of yield curves continued during the month. An increase in 10 year bond yields relative to 2 year bond yields over the month weighed on both bond and equity returns for the month. Investors are re-calibrating valuations as risk-free rates and long term bond yields are changing. The prospect of higher interest rates for longer is changing risk/reward considerations for all asset classes.

Investment markets were up in July due to optimism regarding evidence of softening inflation. However, this didn’t stop some central banks from tightening monetary policy further. The US Federal Reserve raised interest rates in July to a range of 5.25-5.50% along with the European Central Bank raising rates to 3.75% the highest level since the year 2000. The Reserve Bank of Australia kept rates on hold in July.

Investment markets were up in July due to optimism regarding evidence of softening inflation. However, this didn’t stop some central banks from tightening monetary policy further. The US Federal Reserve raised interest rates in July to a range of 5.25-5.50% along with the European Central Bank raising rates to 3.75% the highest level since the year 2000. The Reserve Bank of Australia kept rates on hold in July.