Research Insights - Market Commentary February 2023
Volatility in investment markets continued in February as bond yields once again rose, negatively impacting the prices of bonds and most equity markets. Inflationary pressures, while showing signs of slowing, remain elevated beyond the comfort levels of global central banks. Investors meanwhile continue to contemplate when and where cash rates may peak and what the implications are for the global economy. Global central banks raised interest rates during the month, including the RBA which took the cash rate 25bps higher to 3.35%.
The Australian share market was down (-2.4%) in February, with the Materials sector and Financials sectors the worst performers. The recent corporate reporting season in Australia highlighted the more challenging environment confronting many Australian companies. Profit margins have been under pressure as rising operating costs outpaced revenue increases for many companies. Companies are seeing cost pressures mount with labour costs cited by some companies as an ongoing concern moving forward. Profit growth and dividend growth is proving increasingly more difficult and of note was the reduction in dividends announced by large, diversified mining companies such as BHP and Rio Tinto.
Currency-hedged international equities declined (-1.6%) largely driven by a sell-off in US equities, which represent around 70% of the benchmark, as higher and potentially more persistent inflation numbers helped to reprice rate hikes further with a 5% terminal US cash rate being more likely. European equities fared much better and were positive in the month. Unhedged international equity returns rose by 2.1% thanks to a falling Australian dollar which fell (-4.2%) in February to close at US$0.6752.
The Australian 10-year government bond yield rose by 30bps to 3.85% and the 2-year government bond yield rose by 47bps to 3.59%. The US 10-year government bond yield rose by 41bps to close at 3.92% and the US 2-year government bond yield rose by 61bps to 4.82%.
Key Developments Post Month-End
Australian CPI rose 7.4% to end-January 2023, coming in below expectations of an 8.1% increase.
The RBA at its March meeting on the 7th March increased rates by 25bps with the cash rate target now at 3.60%.
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