Prior to the global financial crisis, nearly $17 trillion of developed nation bonds were rated AAA. Now there are less than $2 trillion. Not only has supply been restricted, but also diversity, with the number of AAA rated countries falling from 15 to 9.
In its September Federal Open Market Committee (FOMC) statement, the US Federal Reserve (Fed) renewed its pledge to keep interest rates near zero for a considerable time after its quantitative easing (QE) program ends in October.
Asia Pacific markets succumbed to profit-taking after registering seven consecutive months of positive USD based returns. The MSCI Asia Pacific ex-Japan Index was down 7.2% for the month in USD terms as the strengthening dollar magnified the loss.
Since the start of October, the Japanese stock market has shown weak performance. Heightened concerns over the worsening economic climates in Europe and China and less bullish forecasts on the U.S. economic recovery drove stocks in Europe and the U.S. sharply down, with the Japanese market following suit.
The currency markets in September saw a sharp weakening of the yen and strengthening of the U.S. dollar, with the yen starting the month trading at about 104 to the dollar, but weakening to about 109 by the end of the month.
The Japanese stock market made large gains starting from the end of 2012, but concerns over geopolitical risk in Ukraine and potential debt default in Argentina led to market sentiment weakening from the beginning of 2014.
A confluence of factors worked against the Australian market during the month. Regulatory concerns in the banking sector, lower commodity prices and a weaker Australian dollar were the key drivers of the market’s underperformance.
Much as we expected, China’s economy has continued to slow faster than consensus, but does not appear to be in a hard landing.
In the Australian credit market, the relative lack of supply compared with demand continues to cause spreads to tighten in the physical market offsetting the risks of an unstable geopolitical environment.
Reasons for the recent weakness in the AUD include a fall in the iron ore price, the rally in the US dollar, weaker Chinese data, and indications that the Reserve Bank of Australia is considering macroprudential controls.