US Fed tightens rates whilst the ECB eases

After many months of speculation the US Federal Reserve has raised interest rates for the first time in almost a decade, lifting the US federal funds rate target by 0.25% at their December meeting.

In contrast, the European Central Bank (ECB) announced further economic stimulus measures including a cut in deposit rates (to -0.30%) and an extension of its asset purchasing programme to support financial conditions until March 2017.

RBA has scope to cut rates if required

The Reserve Bank of Australia (RBA) indicated there is scope for additional easing in interest rates if the Australian economy requires more support. Australian employment conditions have improved with the unemployment rate now at 5.8% but business spending remains weak with recent data showing a fall in mining sector investment.

The RBA has kept Australian interest rates unchanged at 2.00% since May 2015.

Australian shares bounce back despite a further decline in commodity prices

The Australian share market has managed to cap off 2015 with the S&P/ASX 300 Accumulation Index1 gaining +5.53% over the last three months and trimming the calendar year return to -1.87%.

The slide in commodity markets has been a major drag on the performance of Australian shares in 2015. The price of iron ore2 has fallen almost 50% in the last 12 months to around US$37 per tonne by December 2015. Crude oil3 prices have seen a similar dramatic decline in 2015, plummeting more than 35% to trade below US$40 per barrel by the close of the year.

Overseas shares fare well in volatile markets

The past 12 months have been an eventful period for overseas markets, with global shares weathering share market volatility and economic growth concerns in China, on top of Eurozone instability including a possible Greek default, tumbling energy prices, outflows from emerging markets, and the uncertainty of interest rate rises in the US.

Overseas shares underperformed Australian equity markets over the last three months with the MSCI World ex Australia Index4 (unhedged in AUD) returning +1.72% for the quarter. This caps off a +11.80% net return for the 2015 calendar year.

Caution in bond markets as US rates rise

Bond investors remain cautious with interest rates around the world remaining at historic lows, recent volatility hitting high-yield markets and now with the prospect of further interest rate rises in the US.

Expectations of rising interest rates (and increasing bond yields) have held back the performance of bond returns5 compared to previous years and bond markets could soften further if developed economies tighten monetary policy as economic conditions improve.

Australian bond markets, as measured by the Bloomberg Ausbond Composite Index6, closed the calendar year with a +2.59% gain, significantly lower compared to the previous year that returned +9.81%.

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1 S&P/ASX 300 Accumulation Index includes up to 300 of Australia’s largest shares by float-adjusted market capitalisation

Bloomberg Iron Ore Spot Price Index 62% Import Fine Ore in USD

3 Bloomberg West Texas Intermediate (WTI) Cushing Crude Oil Spot Price

4 MSCI World ex Australia Index (unhedged in AUD) covers 22 of 23 developed markets excluding Australia

5 The price of bonds moves in the opposite direction to the change in interest rates or bond yields.

6 Bloomberg Ausbond Composite 0+ Yr Index comprises of different types of investment-grade Australian bonds