Investors encouraged by expectations of lower interest rates
Investment markets in July were driven by expectations of a more accommodative monetary stance from the world’s central banks, with most asset classes pricing in a 0.25% cut from the US Federal Reserve (Fed). Expectations of the increased stimulus, combined with intermittent truces in the trade war between the US and China, led to investors generally minimizing the impact of a series of downbeat economic reports.
On the last day of July, the Fed announced the expected cut – its first in more than a decade – but with Fed Chair Jerome Powell remarking that future rate cuts are “not what we are seeing now,” US equity markets moved lower on the guarded message. Nonetheless, July saw most major indexes posting gains for the month, with the MSCI All-Country World Index gaining 4.1% (total returns in sterling).
Once again, the American markets posted the strongest gains, with the broad-based S&P 500 Index hitting a new high. Corporate earnings season was generally positive, albeit driven largely by share buy-backs (companies buying back their own shares, which drives up the price), while economic data was mixed. The jobs market showed a recovery from June and second-quarter GDP came in a 2.1%, higher than generally expected. Manufacturing data was more muted, down 0.5% from June, leading to concerns this part of the US economy could see a significant impact from the ongoing trade wars with China.
In the UK, the FTSE 100 had a positive month on the back of the weakness in sterling. This index has large exposure to international earnings, so its component companies benefit from the pound moving lower. As has been the case since the referendum, Brexit uncertainties weigh heavily on sterling, and this month was no exception. The pound hit a 2-year low versus the US dollar, as new Prime Minister Boris Johnson took office and the perceived likelihood of a “no-deal” Brexit increased. With the date set for 31 October, Johnson has limited time to negotiate a new settlement with Brussels or leave the European Union without a trade deal. Consumers appeared to be feeling nervous about the uncertainty, as retail data declined for the third straight month. The Bank of England (BoE) issued a dire warning that a no-deal exit could have a material negative impact on the British economy. Shortly after month-end, the Bank also cut its growth forecast for the UK economy over the next two years.
While BoE guidance over the future direction of its interest rates remained unclear, the European Central Bank (ECB) seemed poised to issue a monetary easing programme to stimulate its stalled economy. Christine Lagarde, head of the International Monetary Fund, is set to take over from Mario Draghi as ECB president at the end of October and is generally expecting to continue the dovish approach (more likely to favour accommodative policies).The Eurozone economy grew at 0.2%, down from 0.4% in the previous quarter, and inflation moved slightly lower. Against this backdrop, European shares were flat for the month.
Japan notched a modest gain for the month, while the rest of Asia moved lower on fallout from the trade wars and a stronger US dollar. South Korea and India had the weakest performance among Asian markets, although Taiwan was able to eke out a gain, thanks to the stronger performance of some of its IT companies. Global emerging markets generally underperformed developed markets (those whose economies are more mature), but Turkey and Brazil had positive returns on rate cuts and financial reforms, respectively.
In the world of fixed-income, global government bonds had a positive month overall, particularly in the UK and Europe (yields on US Treasuries ended July fairly unchanged). Both investment-grade and high-yield corporate bonds had a strong showing, outperforming government bonds. The ‘spread’ (the difference in yield) between government and corporate bonds narrowed amid expectation of more fiscal stimulus and lower rates from the world’s central banks.
Finally, commodities had mixed performance for July, with the price of Brent Crude oil down despite heightened tensions in the Persian Gulf. Often, a potential threat to supply would drive the price up, but oil is traded in US dollars so a stronger dollar such as we saw in July can drive the commodity price lower. Natural gas prices rallied, as did precious metals.
Looking ahead, many of the same factors impacting markets remain in place. As ever, we will be keeping a watchful eye on macroeconomic and geopolitical developments, as well as movements in the investment markets. Especially in this type of market environment, we continue to maintain our long-term outlook in line with the needs of our customers.