July Market Update: Global markets rally as corporate earnings deliver

For financial professionals only

In a nutshell:

• Global markets rally
• Inflation hits record levels
• Federal Reserve delivers the most aggressive tightening in decades

What’s moving markets

US inflation rose to 9.1% in June, up from 8.6% in May -the highest level recorded since November 1981. Energy prices rose by 41.6%, food by 10.4% and rents by 5.6%. The US Federal Reserve (Fed), reacted with a 0.75% raise in interest rates for the second time in a row - the most aggressive tightening since the 1980s. The Fed funds rate now sits in a target range of 2.25% - 2.5% with investors anticipating rates to peak at around 3.4% in 2022, and 3.8% in 2023.

Meanwhile, US house sales are slowing and there are signs that spending and production are slowing too. Jerome Powell, the Fed Chair, stated that he doesn’t believe the economy is in recession. However GDP figures released the day after the July Fed meeting showed the US economy shrank for the second straight quarter.

In the 12 months to June, the UK inflation rate hit 9.4%, another 40 year high, largely driven by motor fuel prices. Average petrol prices stood at 184 pence per litre in June, compared to 129.7p a year ago, and rose by an average of 18.1% in June alone. Given the ongoing global issues, the race for Number 10 is a side show. It remains to be seen how markets will react to a new Prime Minister given the stark differences between the proposed economic policies of Truss and Sunak.

In the European conflict zone, Russia and Ukraine signed a deal to resume the export of grain through the Black Sea. After a 10-day maintenance period, Russia resumed pumping gas to Europe through its Nord Stream 1 pipeline, back to 40% of capacity. However, Gazprom (the Russian state-owned energy giant) announced further maintenance works which will cut supply back to 20%. European natural gas prices jumped 10% as a result, further compounding inflationary woes on the continent.

Eurozone inflation rose to a record 8.6% in the 12 months to June, as food, fuel and energy costs soared. In response, the ECB raised interest rates for the first time since 2014, from -0.50% to 0.0%, stating that further hikes will be appropriate. At the same time, they announced an initiative to help indebted Eurozone countries like Spain and Italy. This may need to kick in sooner rather than later, following Italian Prime Minister, Mario Draghi’s resignation.

China is bucking the trend from an inflationary and monetary policy point of view, and its approach to Covid. Although low compared to the rest of the world, China’s inflation rose to 2.5% in June, up from 2.1% in May. This was driven by rising food prices. Meanwhile, mortgage protests broke out as the property sector struggled to fund projects that Chinese buyers are already paying mortgages on. China has been considering additional stimulus measures that will allow local governments to sell $220 billion of bonds to finance infrastructure spending as economic growth slows. Rolling lockdowns remain in place, with almost one million people in the city of Wuhan experiencing a 4-day lockdown in July. It’s unclear whether China’s zero Covid policy will change, but interruptions could have knock-on effects to already delicate supply chains.

Asset class implications…

The selloff in government bonds abated over July with the FTSE Actuaries UK Conventional Gilts All Stocks returning 2.62% over the month. A less hawkish Fed and an increase in the likelihood of recession prompted traders to dial back bets on central bank interest rate hikes. Corporate bonds also rallied over the month with optimism for a softer landing. The selloff in fixed income assets this year has been painful, but the fundamental diversification benefits for investors remain.

Equity markets had a tumultuous July but rallied strongly later in the month following the latest Fed meeting. The S&P 500 experienced its best month since November 2020, rallying 6.52%. Strong corporate Q2 earnings from the tech mega caps contributed to the strong month end rally, with corporate America now looking resilient to the economic slowdown. Emerging markets fell slightly as recessionary fears mounted and China showed little signs of economic recovery. The latest Chinese PMI data fell from 50.2 in June to 49 in July, suggesting the manufacturing sector is contracting.

July has brought a sigh of relief for investors following a very difficult first half of the year. Corporate earnings, so far, have delivered solid results, driving risk sentiment. While these are still uncertain times, diversification is the investor’s best strategy to deliver risk adjusted returns in line with expectations, over the longer term.

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.

Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.