What's moving markets
Despite the continuous downpours we experienced throughout July, there were finally some bright spells in the economic data. Whether it’s just a short respite from the negativity or the beginning of a more prolonged period of better news remains to be seen, but the positive sentiment filtered through to equity markets throughout the month.
After a disappointingly stubborn inflation print in May the Bank of England desperately needed the inflation figures for June, (released in July) to show some signs of progress. Luckily the UK’s inflation rate cooled more than expected to the lowest level in a year. The Consumer Price Index was 7.9% year on year to June, a sharp drop from 8.7% in May - this was the first downward surprise to inflation figures in five months. You could almost hear the collective sigh of relief from Threadneedle Street!
Bond markets rallied with the yield on the UK 10-year Gilt falling by 13bps. Local stock markets also rallied with the FTSE 100 finishing the day 1.80% higher and the more domestically focused FTSE 250 rising by 3.78%. After accelerating the pace of interest rate increases again last month, the June inflation figures may let the Bank of England slow the pace again, and adjust their expectations for peak rates.
Good news continued across the Atlantic too. The annual inflation rate in the US slowed to 3% in June compared to 4% in May, the lowest level since March 2021.
Despite that, the Fed raised interest rates again and lifted the target range for its benchmark federal funds rate from 5.25% to 5.5%, the highest levels for both since 2001. This is the 11th increase since March 2022, when the rate was near zero. The Fed have left the door open for another possible hike in September, if necessary.
In the Eurozone, headline inflation fell to 5.5% year-over-year in June, down from 6.1% in May, and almost halving the headline rate since its 10.6% peak in October 2022. Core inflation edged slightly higher however, to 5.4%, up from 5.3% in May. The European Central Bank lifted interest rates by another quarter-point, keeping options for the next meeting open as its unprecedented hiking campaign nears an end.
The Bank of Japan (BOJ) tweaked their yield curve control policy again in July, keeping the target for 10-year Japanese Government Bond yields at about 0%, explaining the 0.5% ceiling was a reference point and not a rigid limit. The BOJ plans to buy 10-year bonds at 1% every business day, effectively capping the yield at that higher level. This “doubling of the range” could be seen as a further step in the BOJ’s plan to move away from its ultra loose monetary policy.
Asset class implications
The remarkable year for equity market returns continued with all the major broad market indices delivering robust returns. The FTSE USA is leading the way year-to-date as the rally in the large tech stocks continues to dominate performance. The US rally has now started to filter down into the wider index, leading to a broadening of contributors to returns. Just look at the S&P 500 index rising by 1.89% over the month vs the S&P 500 equal weighted index rising by 2.20%.
Emerging Markets rallied strongly into month end, led by Chinese equities as Beijing signalled it would provide more stimulus to boost domestic consumption and enhance support for the ailing real estate sector following a flagging recovery after the end of pandemic restrictions.
The FTSE Emerging Markets index rallied 4.88% on the month with a 9.21% return from China (which makes up 33% of the index) and a 6.40% return from Taiwan, the third biggest index constituent. The rally was broad based with small and mid-caps leading the way, as well as value as a style.
The other notable returns came from FTSE Asia Pacific Ex Japan. However as with Emerging Markets, China and Taiwan drove the majority of returns. Returns for both indices are now in positive territory YTD.
UK Gilts produced positive returns over the month as the better-than-expected news on headline inflation led markets to reprice their expectations for what the Bank of England’s terminal rate may be. Gilt yields fell on the back of this news which sent prices higher. The FTSE Actuaries UK Conventional Gilts All Stocks ended the month 0.76% higher.
The lack of breadth in US equity returns continues to be of concern and we believe it’s prudent to remain underweight the US for the time being. Pockets of valuation exist within equities and this is especially the case in the UK and Emerging Markets. The outlook for high quality, liquid fixed income remains attractive and the forward returns for the asset class, coupled with the yields on offer, could offer an exciting proposition for client portfolios. Prudence remains the key for us while maintaining discipline in our approach to managing risk.
|FTSE Actuaries UK Conventional Gilts All Stocks
|ICE BofA Global Broad Market
|IA UK Direct Property
|FTSE All Share
|FTSE World Europe ex UK
|FTSE Asia Pacific ex Japan
Source: FE Analytics, GBP total return (%) to last month end
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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.