Markets in April were particularly strong with both Australian and world markets up on average between 2% and 4%.

Geopolitical risk is back again with President Trump threatening to resume the escalation of tariffs on China and reports that North Korea fired a short-range missile. Trump’s threat to increase the tariff on US$200 billion of imports from China from 10% to 25% (delayed from January) and look to tax remaining imports from China (which will take time) suggest that the latest round of trade talks did not go as well as planned and looks aimed at putting pressure on China to resolve the talks. Ultimately, we remain of the view that there will be a resolution given that the economic damage of not doing so would create problems ahead of Trump’s re-election bid next year. US presidents don’t get re-elected when unemployment is rising. But the latest threat adds to the risk of market weakness in the short term. 

The Fed provided no surprises but it disappointed markets who were hoping for talk of a rate cut. Basically, the Fed remains confident on growth and sees low inflation arguing against a rate hike but also sees the recent fall inflation as “transitory” and the economy as mostly strong which argues against a rate cut. The latest Goldilocks jobs report showing strong jobs growth and ultra-low unemployment but benign wages growth will likely reinforce the Fed’s patience on rates. So, it remains on hold regarding rates and is likely to remain so for the next six months. And it’s still on track to end quantitative tightening this year. Short term noise aside, the Fed is providing a favourable back drop for investment markets.
Approximately 78% of US S&P 500 companies have now reported March quarter earnings results and while corporates are cautious results overall remain far better than expected. Around 76% have beaten on earnings with an average beat of 6% and 57% have beaten on sales. Earnings growth started the reporting season with expectations for a 2% fall on a year ago but has now risen to around 2% and this is likely to mark the low point for this year. Median company earnings are up 5%.
The Reserve Bank of Australia (RBA) left the official cash rate on hold at 1.5%. Heading into the meeting the focus had shifted from the strength in the labour market to the weakness in inflation as a driver for a rate cut. However, just 10 days from an uncertain Federal election outcome, the RBA was likely to bide its time and maintain its neutral setting. The labour market remains the key to the RBA’s outlook. Any signs of softness in the labour market data will mean a change to the inflation outlook and cuts to the cash rate this year. 
Share markets – globally and in Australia - have run hard and fast from their December lows and are vulnerable to a short-term pullback. But valuations are okay, global growth is expected to improve into the second half of the year, monetary and fiscal policy has become more supportive of markets and the trade war threat is receding, all of which should support decent gains for share markets through 2019 as a whole.
Low yields are likely to see low returns from bonds, but government bonds continue to provide an excellent portfolio diversifier. Returns from cash and term deposits remain low.