By Jan Faure
Global markets were mixed in July with interest rate sensitive assets gaining most as rate cut expectations were brought forward following weaker than expected US inflation data. Volatility increased across markets driven by political upheaval in the US, escalating tensions in the middle east and concern over continued economic weakness in China.
In the US, headline inflation (CPI) declined by more than expected to 3.0% YoY in June from 3.3% in May. This, combined with weaker US jobs data, bolstered the view that the US Federal Reserve will cut rates at each of the three remaining Fed meetings in 2024 (beginning September). Against this backdrop, interest-rate sensitive assets outperformed - global REITs gained 6.1% while the Bloomberg Global Aggregate Bond Index advanced 2.8%.
US equity markets initially lost ground as softer inflation data spurred a major rotation into small-cap stocks. The broad sell-off in mega-cap stocks came as investors assessed the impact of lower interest rates on the corporate sector. Optimism about improved credit conditions led markets to rotate into traditional sectors and sell positions in high valuation (mostly AI) stocks.
Towards the end of the month US stocks were supported by a better-than-expected 2.8% expansion in second quarter US GDP. This strengthened the view that the Federal Reserve can curb inflation without damaging the economy. Overall, the S&P 500 gained 1.1% for the month while the tech-heavy Nasdaq declined by 0.8%. US small caps returned 10.1% for the month (Russell 2000 index), playing catch-up in a US equity market that has been dominated by the performance of the ‘Magnificent Seven’.
In Japan, the Bank of Japan hiked interest rates as it tries to normalise monetary policy. Consequently, the yen rallied sharply against the dollar, gaining 6.5%, while the Nikkei 225 declined 1.2% for the month (a strong yen hurts the profit outlook for Japan’s export-orientated companies).
Hong Kong and Chinese equities declined in July despite China’s central bank cutting short and long-term interest rates. Concerns about China's economic outlook intensified following disappointing GDP figures which was largely driven by a persistent property downturn and weak domestic demand. Concerns are also growing that China could become a central focus of Donald Trump’s foreign policy if he wins the US presidential race, potentially impacting global trade, geopolitical stability, and market sentiment. Meanwhile, the Biden administration is considering implementing strict export controls to limit China’s access to advanced chip manufacturing tools. In response, China’s leaders have pledged to step up support measures and stabilize market confidence.
Table 1: Global Indicators – Local reporting currencies
