Market Analysis Jul 2023

The US equities market advanced in July, with economic indicators pointing to steady growth and a decline in inflation. The Federal Reserve (Fed) implemented a 0.25% rate hike during the month. While the Fed did not provide a definitive stance on further rate hikes in September, market expectations lean toward this being the last hike of the current cycle.

The possibility of a "soft landing" scenario gained traction, indicating the Fed's success in moderating growth and controlling inflation without inducing a recession.

Inflation, as measured by the consumer price index (CPI), increased by 0.2% (month-on-month) in June, following a 0.1% rise in May. This growth fell short of market predictions, resulting in an annual inflation rate of 3.0%. Q2 saw the US economy expand at an annualized rate of 2.4% (quarter-on-quarter), surpassing the forecasted 1.8% expansion.

Energy sector stocks gained momentum due to projected supply constraints and positive growth data. Several media and technology giants, as well as certain banking stocks, demonstrated strong performance. However, healthcare and consumer staples sectors lagged behind, although no sector reported overall negative returns.

July witnessed gains in Eurozone shares, buoyed by decreased inflation and positive economic growth indicators. The real estate, energy, and materials sectors led the charge, while consumer staples, information technology, and utilities sectors lagged.

The European Central Bank (ECB) implemented a 0.25% interest rate increase in July. Investors began speculating that the central bank might be approaching the end of its rate hike cycle due to falling inflationary pressures. Euro area annual inflation for July was estimated at 5.3%, down from June's 5.5%.

Economic growth data indicated a 0.3% quarter-on-quarter (q/q) growth in Eurozone GDP for Q2. Forward-looking data released in July indicated a cooling economy, with the flash Eurozone purchasing managers’ index (PMI) dropping to an eight-month low of 48.9, primarily due to weak manufacturing activity. (A PMI reading below 50 implies contraction, while above 50 implies expansion.)

Q2 marked the beginning of the earnings season, and results so far have shown resilience. Some food and beverage companies reported weaker volumes as consumers reacted to higher prices. Bank earnings continued to benefit from higher interest rates.

UK equities observed growth in July, primarily driven by domestically focused sectors as investors shifted away from aggressive rate hike expectations set by the Bank of England (BoE). The Office for National Statistics reported a sharp drop in headline inflation to 7.9% and core inflation to 6.9% in June, contributing to this shift.

As a result, UK gilts experienced a rally (yield decline) during the period. Gilt yields hold significance for the UK domestic economy, impacting "swap rates" used for fixed-rate mortgage pricing. The retreat of these rates from elevated June levels led to rebounds in domestically focused sectors like housebuilders and real estate. Despite easing inflation concerns, various activity indicators hinted at economic stagnation.

International sectors, including basic materials and energy, bounced back due to recovering commodity prices. Industrials also demonstrated strength, reflecting a positive global economic outlook. Most sectors experienced gains in the month, except utilities and healthcare.

The Japanese equity market continued its modest growth in July, with the TOPIX Total Return index rising by 1.5% in local terms. The upswing was driven by mid and small cap stocks, which had lagged during the June rally. However, the Nikkei 225 index slightly declined by -0.1%.

The month began with the Nikkei reaching another 33-year high before experiencing profit-taking pressure, leading to a period of sideways movement. The market awaited quarterly earnings reports and the Bank of Japan's (BOJ) policy meeting scheduled later in the month.

Positive sentiment in the US stock market and improved market sentiment in the US contributed to the Japanese market's support.

Solid quarterly earnings results contributed to Japan's positive macroeconomic figures. Although concerns arose about potential BOJ policy changes, the market impact remained limited as BOJ Governor Ueda made moderate adjustments to the yield curve control (YCC) policy.

Asia ex Japan equities registered positive growth across all index markets in July. China's government unveiled initiatives to stimulate its economy and bolster consumption.

Mainland China, Malaysia, and Singapore exhibited strong performance, while Taiwan, Indonesia, and the Philippines achieved more modest gains. China's sharp increase in share prices followed government pledges to support real estate sales and other struggling sectors to boost economic growth.

Singapore's stock market experienced robust growth due to favorable tourism data and solid performance by banks, coupled with expectations of higher dividend payments. Taiwan's foreign investors embraced AI and chipmaking stocks, overshadowing geopolitical concerns. South Korea also achieved solid gains driven by enthusiasm for AI-related stocks.

Emerging market (EM) equities surged in July, outperforming developed market equities as Chinese authorities introduced measures to support the real estate sector and consumption, along with efforts to alleviate local government debt burdens. Additionally, stronger commodity prices positively impacted select EM economies.

Turkey notably reversed its significant underperformance from June, with Colombia and South Africa benefiting from stronger energy prices and improved commodity prices. Peru gained traction due to robust copper prices.

China's economic data remained relatively resilient, with news of economic stimulus boosting investor sentiment. Poland, Thailand, and the Czech Republic outperformed, and Chile performed well despite trailing the benchmark. Greece and the UAE remained positive but behind the index. Brazil and Mexico lagged due to mixed economic indicators.

India faced underperformance due to persistent food price increases affecting headline inflation. Taiwan's mixed performance resulted from AI stocks' strength offset by weakness elsewhere. Egypt posted the only negative return among emerging markets.

July 2023 maintained the trend of robust performance in riskier assets, with government bonds experiencing relative underperformance. The US reported lower-than-expected inflation figures, fostering optimism about avoiding a severe economic downturn. The concept of a "soft landing" gained momentum. Both the US Federal Reserve (Fed) and the European Central Bank (ECB) raised rates by 0.25%, as anticipated, while emphasizing data-dependency in forward guidance.

Global government bond markets generated overall negative returns in July. However, yields on shorter-maturity securities trended lower, reflecting indications that central banks might slow down interest rate hikes.

The US 10-year yield continued its upward trajectory, rising from 3.81% to 3.95%. The two-year yield remained at 4.87%. Germany's 10-year Bund yield increased from 2.40% to 2.47%, while the two-year yield decreased slightly from 3.27% to 3.21%. French, Italian, and Spanish 10-year bond yields climbed, while their two-year yields decreased.

In the UK, the Bank of England's (BoE) Monetary Policy Committee (MPC) did not convene in July. However, more favorable inflation news prompted investors to adjust extreme rate expectations. Consequently, UK gilts outperformed other major government bond markets during the month. The UK two-year yield declined from 5.26% to 4.98%, and the 10-year yield also decreased from 4.39% to 4.31%.

The Bank of Japan (BoJ) introduced market volatility by adjusting its yield curve control (YCC) policy, which slightly impacted Japanese government bonds.

Softer inflation combined with resilient US growth supported credit markets. Both US and European investment-grade and high-yield bond markets yielded positive returns, surpassing government bonds for the month.

In terms of currency, the US dollar weakened against its G10 counterparts. While US growth positively influenced risk sentiment, higher-yielding and commodity-related currencies benefited.

The Refinitiv Global Focus convertible bond index achieved a 2.7% advance in US dollar terms, reflecting strong participation in equity market gains during July. Primary market activity for convertibles remained subdued, with $3.4 billion of new issuance. Convertible bond valuations continued to reflect limited investor interest in the asset class, and Asia maintained its position as the most attractively priced region for convertibles.