By TWD Invest

August 26, 2019 | News

July 2019 In Review

Economic Developments


  • Australia continues to face considerable external economic risks, including a slowing in the global economy and ongoing trade negotiations between China and the US. The Australian dollar has reduced to 0.6810 against the US dollar as expectations that the Reserve Bank of Australia will need to further reduce interest rates.
  • Australia’s unemployment rate remained steady at 5.2% during May and June, the unemployment rate will need to be watched closely given Australia’s high household debt levels, in order to monitor debt serviceability.
  • Globally negative-yielding Bonds are valued at approximately US$15 trillion. This means that investors are paying governments for the right to hold government debt. It is important for the reader to understand that government debt is commonly viewed as the safest form of debt. However, a negative-yielding bond can also be thought of as a quasi-default.
  • The primary reason an investor would purchase a negatively yielding bond is that they expect alternative assets to decline significantly more than the cost of holding the debt, during the period when the position is held. Another reason is to hedge in the Derivatives market, for example, buy a German ten-year bond at ~-0.5% yield, and hedge the Euro currency value to US dollars using a forward currency hedge. Since the interest rate differential in the currency forward is approximately 2.5% [US interest rate], this turns the -0.5% yield into a potential +2% yield. Now, who would be sophisticated enough to do that? The answer is probably global banks that deal in currency hedges and /or Exchange Traded bond Funds who must hold certain bond positions. It is possible these investors are also concerned about either the fiat currency system itself or risks in the Over-The-Counter [OTC] Derivatives market which could potentially translate into problems in the banking system. [fiat –  is a currency that obtains its base value by decree rather than through physical asset backing, such as gold. Today most global currencies are fiat].
  •  The Australian market is anticipating further cuts to the Cash rate [currently 1.00%], possibly to 0.50% in 2020, with some speculation that the RBA may ultimately be forced into quantitative easing [QE] or negative rates.
  • Current global monetary policy is largely experimental. While negative yields are designed to drive funds into a wider array of asset classes, at the same time they act to suck money out of an economic system. Low interest rates are meant to act as a stimulus by lowering the cost of money, but they also tend to suppress the activity of those who earn funds through the interest rate market. One of the problems for central banks is that low interest rates bring demand forward, but this also acts to create clear air pockets of low demand in future. Forcing the central banks to lower rates again in a feedback loop. The scope to continue this lower interest rate activity is diminishing unless rates are pushed strongly negative as is speculated by some and commented upon by the International Monetary Fund [IMF].  

Gold and Nickel Prices:

  • One of the key arguments against holding gold is that it does not pay a yield, as such there is an opportunity cost to hold the metal. However, with a significant quantity of negative-yielding debt instruments globally and the potential that interest rates could be pushed into the negative meaning that holding cash would effectively be a  part liability, the opportunity cost of holding gold has diminished. This has increased gold purchases by both the private sector and central banks, who also want to hedge against risk in fiat currency and the economic system.
  • At the time of writing gold is trading at US$1,508.40/oz or A$2,201/oz [which has increased due to the recent fall in the value of the Australian dollar against the US dollar. Given risks in the structure of the global economy, many investors are starting to hedge risk in gold. Fiat currency daily turnover is approximately US$5 trillion, global physical gold turnover is not available however, the largest market [London] turns over approximately US$37 billion per day. Thus gold potentially has significant leverage.
  • Nickel prices have flicked to US$16,690/t the highest level since April 2018 on speculation that major producer, Indonesia, will slow or ban exports.
  • Iron ore prices appear to be turning lower after their strong run.
  • Western Australian exports recorded a $161 billion surplus in the past year assisted by strong iron ore and other commodity export prices.


Bond Markets: Australian 10-year bond yield dipped to an all-time low of 1.04%

  • The 2-year yield is  0.75% and the 5-year yield is 0.72%. The Reserve Bank has held the cash rate at a record low of 1.0% at its meeting on 6 August [next RBA meeting 3 September] still below the inflation rate of 1.6% per year, with expectations of more rate cuts to come.


  • The US 10-year bond yield is at 1.64% the lowest level since October 2016. With the German 10-year bond yield at -0.58%. Which at least, in theory, would suggest that the market sees lower risk in German bonds, though in reality is likely to be a vote on the market’s view of which central bank will be the most aggressive in asset purchases.
  • German exports fell 0.1% in May, but were down 8% on a year-on-year basis, the steepest rate of annual decline in three years. Weaker Chinese demand was seen as the primary reason for the export fall.
  •  The European Central Bank [ECB] expects rates to stay at current low levels at least through the first half of 2020, with the central bank looking at options for further stimulus measures. The ECB is widely expected to recommence bond buying in September.
  • Trade negotiations between the US and China are ongoing with commentary suggesting they are unlikely to be resolved until 2020.
  • China’s factory-gate prices or Purchasing Price Index [PPI] shrank for the first time in three years in July, while food prices jumped 9.1% from a year ago. The key contributors were a 27% rise in pork prices due to an outbreak of African swine fever, while fresh fruit prices climbed 39.1%.

  • Signs of some pressure in the regional banking sector in China is emerging with three regional banks being supported by the government, with a 2/3 drop in corporate lending in July [according to The South China Morning Post newspaper], though additional liquidity provided by the central bank may be assisting. China appears to be quite volatile economically as trade negotiation influence the economy.
  • The next US Federal Open Market Committee meeting is scheduled for 17-18 September. Rates were cut for the first time in 11 years in July with many continuing to expect further rate cuts towards near zero as recession concerns remain. The current Federal Funds rate is 2.25%,
  • The main US yield curve nearly inverted this week as the 10-year yield topped the 2-year rate by 3 basis points. The 30-year US bond rate neared an all-time low.
  • The US Consumer Price Index rose 0.3% in July, the year on year inflation rate is 1.5%.
  • There are two months left in this US fiscal year, and the US Treasury Department is projecting a deficit of just over US$1 trillion. Trillion-dollar deficits look locked in for several years.
  • US 2nd Quarter company earnings are expected to end down 2.8%, this is adding to stock market volatility as the numbers come through.

Market Movements

Australian Equities:

  • The ASX200 Index lifted 16.02% over the last 200 trading days. ASX200 is shown below.

Source: Metastock

  • The five best and worst percentage performers on the ASX200 over the last 25 trading days were PACIFIC ENERGY ORDINARY [PEA] 43.25%, JAMES HARDIE INDUST CHESS DEPOSITARY INT [JHX] 20.21%, AUSTRALIAN MINES LTD ORDINARY [AUZ] 20.00%, RESOLUTE MINING ORDINARY [RSG] 19.40% and EVOLUTION MINING LTD ORDINARY [EVN] 18.96%.The poorest performing stocks were APPEN LIMITED ORDINARY [APX] -22.33%, SYRAH RESOURCES ORDINARY [SYR] -24.61%, INTEGRATED RESEARCH ORDINARY [IRI] -25.73%, CYBG PLC CDI 1:1FOREXEMPT LSE [CYB] -32.50% and CIMIC GROUP LTD ORDINARY [CIM] -32.65%.
  • The five best and worst percentage performing sectors in the ASX 200 over the last 25 trading days were GOLD [XGD] 13.58%, INVERSE DAILY INDEX [XIN] 4.10%, HEALTH CARE [XHJ] 0.79%, EMERGING COMPANIES [XEC] -0.47% and CONSUMER STAPLES [XSJ] -0.99%. The poorest performing sectors were A-REIT EQUAL WEIGHT [XAE] -2.46%, CONSUMER DISCRETIONARY [XDJ] -2.87%, S&P/ASX 50 [XFL] -4.00%, ALL AUSTRALIAN 50 [XAF] -4.02%, and A-REIT [XPJ] -4.19%.        

Global Equities:

  • The broad global equities index (MSCI ACWI) delivered a 0.07% return in July and 2.91% for the past year.  The US S&P500 lifted 1.34% in July, and is up approximately 21% year to date, in contrast, the STOXX Europe 600 Index was down 4.29% over the past month, but up 10.29% year to date. The Shanghai stock index was down 3.84% over the past month and up 13.05% year to date.

Looking Ahead

  • There are signs of slowing in global growth, extended USA-China trade negotiations are concerning markets, as is a significant increase in the volume of bonds that are negatively yielding. We suggest continuing to hold some gold as a fiat currency hedge and maintaining stock market exposure in conservative, strong balance sheet stocks.
  • We expect a further cut in Australian and US interest rates, with the outcome of the local Australian property market largely depend on government and RBA actions going forward.  We expect the US markets to range trade in a volatile fashion over the immediate period and the Australian market to follow in similar style. There are considerable external risks evident for the Australian economy.


The information in this Blog is of a general nature. It does not take your specific needs or circumstances into consideration. You should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.

Words by TWD Invest .