Heightened trade tensions following Trump’s August announcement to increase tariffs on China resulted in a bout of market volatility. 

Developments in the global economy 


The Australian economy started to slow in the June quarter, driven by declining consumer confidence and the housing downturn. GDP grew by 0.5% in the quarter, reducing the annual growth rate from 1.7% in the March quarter to 1.3% in the June quarter, the slowest growth rate seen in nearly 10 years. Drivers of GDP growth in the quarter were government consumption and net exports. Dwelling investment, business investment and inventories were the main detractors. 

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The labour market showed strength in July following the RBA’s June rate cut, with an increase in 41.1k jobs over the month. The unemployment rate held at 5.2% in July and the participation rate edged up 0.1% to a July record of 66.1%. Although wages grew at a slightly stronger-than-expected rate of 0.6% in the June quarter, the annual growth rate remained flat at 2.3%. Dwelling prices in August delivered further signs of stabilisation for the housing market. A steady increase in prices in the last few months and a sharp rise of 1% in the CoreLogic median house price index, suggested that an upward trend in prices was well underway. Sydney and Melbourne housing prices drove the increase rising 1.6% and 1.4%, respectively. 

Private capital expenditure presented a mixed report, with June quarter capex falling 0.5% after a March quarter decline of 1.3%, albeit business spending continuing to increase modestly. Gross company profits improved 4.5% in the June quarter, lifting annual growth from 8.3% to 12.5%, with much of the growth still being led by mining. 

Below average conditions remained evident in the NAB Business Survey, as business conditions fell 2 points to +2 index points in July, pushed by a decrease in the employment sub-index. Business confidence edged higher during the month to +4 index points, however still fell short of the long-term average. 


Trump’s August 1st announcement that the US would impose 10% tariffs on US$300 billion of Chinese goods sparked a slide in global equities. The Chinese government responded by allowing the yuan to break USD/CNY 7 mark in a move that could be interpreted as retaliation. 

Tensions were intensified even further as tweets by President Trump accusing China of currency manipulation caused alarm. The US trade deficit with China widened from US$30.1B in June to US$30.2B in July, a 5 month high. US exports to China are down 18.1% this year, while imports have fallen 12.2%, a reflection of diminishing trade both ways. 

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The University of Michigan US consumer sentiment index slipped from a preliminary reading of 92.1 to 89.8 in late August due to trade tensions and the ensuing volatility, down to its lowest levels since Trump’s 2016 election win. US annual inflation increased from 1.6% in June to 1.8% in July. Core inflation also edged higher from 2.1% to 2.2%, suggesting the figures could be rebounding to the Federal Reserve’s (Fed) target earlier than expected. 

US July retail sales rose 0.7%, after gaining 0.3% in the prior month. Core retail sales jumped 1% in the July. These strong retail spending figures seem to be softening the impact of the decline of industrial and manufacturing production of 0.2% and 0.4%, respectively in July. 


China’s trade surplus with the US grew in August, surpassing a previous record set in June. China’s annual export growth however declined slightly to 9.8%, the weakest rate seen since March, yet only slightly beneath trends. Tensions between China and the US intensified in the latter half of August, with China announcing increases of 5-10% in tariffs on $75B of US imports, plus tariffs for restoration of up to 25% on vehicles and parts. 

President Trump responded with tweets and announced further increases on tariffs. Gao Feng, a spokesperson for China’s Commerce Ministry however stated that they “are willing to negotiate and collaborate in order to solve this problem with calm attitude” signifying optimism in future trade negotiations. 

The Caixin manufacturing PMI edged up from 49.9 in July to 50.4 in August. Despite an expansionary indication (above 50), downward pressure remains in the long-term due to ongoing trade conflicts affecting global demand. Industrial production posted its lowest numbers since 2002, easing from an annual rate of 6.3% in June to 4.8% in July. Retail spending also softened, declining from an annual June rate of 9.8% to 7.6% in July. China subsequently announced in August that they would lower the cost of financing for SME’s by the end of 2019 by 1% to increase the availability of credit. 

In Japan, industrial production fell 3.3% in June after a significant drop in the previous month. The data is signifying slowing factory activity in line with weakening in the global economy. The Japanese trade deficit widened in July from ¥33.9 billion to ¥126.8 billion in August. Exports fell by -1.6% in the year to July compared with a fall in imports of -1.2%. CPI rose by 0.6% in the year to July, edging up from 0.5% in the year from June, highlighting that inflation in Japan remains slow. 


The Eurozone core inflation remained low in July, finishing the month at 0.9%, an increase from 0.8% in June after a decline in previous months. The headline measure decreased from 1.1% to 1%. August annual CPI is predicted to edge up to 1.0%, displaying a slight improvement in conditions, yet still below targets. On a more positive note, July unemployment held at 7.5%, its lowest level since July 2008. 

Political risk became the focal point of European markets in late August as Italy’s Prime Minister Conte resigned, ending the League/5-star coalition. Conte blamed the country’s political crisis on the “irresponsible” Deputy Premier Matteo Salvini. If a new coalition is not formed, a flash election may be called or President Mattarella may have to engage a caretaker technocrat government to enable the submission of Italy’s budget proposal to the EU in latter half of 2019. 

The ZEW Eurozone expectations index fell from -20.3 in July to -43.6 in August, the weakest level since 2011, displaying a deterioration in expectations for economic growth. This was largely due to expected economic weakening in Germany, with German GDP contracting 0.1% in the June quarter in line with the median estimate. German industrial production tumbled 1.5% over June, a fall much sharper than expected, with weakness seen over all major sectors. 

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The economy in the UK contracted 0.2% in the June quarter, primarily driven by the uncertainty caused after the expected Brexit deadline of 29th March. Retail sales were also affected due to the uncertainty of Brexit, as sales rose by only 0.2% in June. This brought the annual growth rate from 3.6% down to 2.9%, but was also partially due to the rise in online shopping. 

Core inflation and headline inflation in the UK both rose slightly above median forecasts, rising from 1.8% to 1.9% and 2% to 2.1% in July, respectively. As the inflation figures posted were slightly above target, the Bank of England may not need to join other central banks in easing their policy. 

Developments in financial markets 

Australian shares 

The ASX suffered its first negative month of the year, with trade tensions and market warnings of a possible economic downturn delivering steep losses in August. The losses were unable to be recovered by a late surge of gains on the ASX, as weaknened sentiment drove investors towards safe haven assets. The ASX 200 Accumulation Index closed the month down -2.36%. 

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The strongest performing sectors were Healthcare (3.53%) and Real Estate (1.75%). The biggest detractors for were Materials (-7.92), Energy (-6.41%) and Telecommunications (-4.53%). 

International shares 

The MSCI World ex Australia (Local currency) Index finished the month down -1.95%, however finished up 0.27% in unhedged AUD. Global equities fell sharply at the start of August due to Trump’s tariff announcement and an unexpected statement from the Fed being that the rate cut was not the start of an easing cycle. 

The inversion of the US Treasury yield curve mid-August resulted in a further tumble in major US equity indexes. The NASDAQ finished the month down -2.46%. 

Escalating trade tensions between China and the US also rattled investors in the Asian markets in August. Sharp falls in the yuan and escalating volatility saw a drop in all major Asian indices with the Hang Seng falling -7.39%, Korean KOPSI -2.80%, Japanese Nikkei 225 -3.72% and the Shanghai Composite down -1.58%. 

The FTSE 100 plunged to its lowest level since the end of February, with mining companies and banks among the top detractors, closing down -5% at the end of August. European markets also hit six-month lows as concern over Germany’s economic outlook grew after a contractionary GDP figure was posted. Losses were seen amongst the STOXX Europe 600 (-1.63%), CAC 40 (-0.70%) and DAX (-2.05%). 

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Fixed Interest 

The bond markets flashed a recession warning in mid-August as the US 10-year bond yield fell below the 2-year US bond yield for the first time since 2007. Although the inversion of the yield curve is not a guaranteed indicator of recession, it indicates weak investor sentiment over the long term. The Australian fixed interest markets finished the month higher, as the Bloomberg AusBond Composite (0+Y) increased 1.51% over August. The Barclays Global Aggregate TR (Hedged A$) also closed the month up 2.20%. 

The UK bond yield curve also inverted over August. German sovereign 30 year bonds started to trade with a negative yield, as well as 10 year German sovereign bonds who hit an all-time record low of -71 basis points. This essentially means that purchasers of these bonds are paying the German government 0.71% to hold their funds. 


The AUD/USD dropped around 0.5c on the yuan’s slide in early August, as regional equities and currencies fell. In the following week, the AUD was pushed further down to 0.66, the lowest figure since 2009, caused by an unexpected rate cut of 50 bps by the RBNZ. The dollar recovered slightly, edging up to finish the month at 0.6733, down -1.64% from the end of July. 

The EUR/USD slid and rose in line with US yields over August, ending the month down -0.85% from the previous month, with a price of 1.0982. The JPY/USD also fell throughout the month on Tariff news, finishing the month at a price of 106.28, down -2.3%. President Trump tweeted that he is not thrilled by “our very strong dollar” and called for “substantial Fed Cuts” to enable US companies to remain competitive. 

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Commodity prices were down in August with the Bloomberg Commodity Index delivering a weak -2.48% over the month. Iron ore suffered the largest loss, as trade war tensions have slowed demand for production and subsequently raw materials. The price of iron ore ended the month at $87.77, a devaluation of -25.01% from June. 

Generic WTI crude oil hit lows of US$50.52 at the start of the month, yet started to recover following comments from Saudi Arabia to “do whatever it takes to rebalance markets”. The recovery didn’t last long however, as the slump in the equity markets and retaliatory hike in tariffs by China drove crude oil back down below US$54 mid-month. Crude markets edged up slightly at the end of August, with the price finishing at US$55.1, down -5.94% from the prior month. 

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Belinda Frazer