July 2024 Markets in a Minute
Your July 2024 Market Moves
July was yet another action-packed month for global investment markets. Investors tackled a slew of political news flow, from the attempted assassination of US presidential candidate Donald Trump, to Sir Keir Starmer’s landslide win for the Labour Party. The Labour Party appeared to offer a level of stability for the UK, bolstering the case for it becoming a more attractive proposition to overseas investors. Interest rate decisions also caught headlines, with the most surprise coming from the Bank of Japan (BoJ) which opted for an increase in its main policy rate to 0.25% from a range of 0%-0.1%. Despite the political noise and mixed economic news increasing volatility, it was, in fact, the world’s largest technology companies – dubbed “the Magnificent Seven” – that were the centre of attention for markets. Some of the Seven released trading updates that raised more questions than answers.
The UK post-election economy shows signs of a cooling
The British public headed to the polls for the first general election in nearly five years. Labour secured a well-forecast victory, winning 412 of the 650 seats on offer and seeing Keir Starmer appointed as Prime Minister, putting an end to 14 years of Tory rule.
The UK’s economic prospects for the rest of the year have improved after the general election, according to Fitch Ratings, an influential credit rating agency. Fitch upgraded the outlook on the UK’s AA- rating from negative to stable after the disorder caused by Liz Truss and Kwasi Kwarteng’s mini-budget. Fitch stated that the election result will mean more “near-term political stability”.
The Bank of England (BoE) cut its key interest rate by 0.25% to 5.00%, its first reduction to borrowing costs since the start of the coronavirus pandemic in March 2020. The Monetary Policy Committee came to a split 5-4 in favour of the decision. Governor Andrew Bailey also said that policymakers were not about to embark on a rapid succession of cuts, stating, “we need to make sure that inflation stays low, and be careful not to cut interest rates too quickly or by too much.”
The UK job market continued to cool according to the Office for National Statistics (ONS), with wage growth slowing to a two-year low of 5.7% between March and May. The unemployment rate remained at 4.4%, according to the latest official labour market figures.
Politics and mixed economic data fed into a more clouded outlook for the US
July marked a pivotal moment in political history, after the shocking attempted assassination of presidential candidate Donald Trump and the announcement from US President Joe Biden that he wouldn’t run for a second term. Vice President Kamala Harris became the Democrat’s favoured candidate.
The headline US annual inflation rate eased to 3% in June, the lowest in a year, and down from 3.4% in May, according to official figures. Economists had expected inflation to fall to 3.1%. This lower-than-expected inflation reading boosted hopes of an interest rate cut in September.
Jerome Powell, chair of the US Federal Reserve, stated during his testimony to Congress last week that the inflation environment was improving. He stated that “holding interest rates too high for too long would threaten economic growth and jobs”, the US is “no longer an overheated economy”, and that its job market has “cooled considerably” from its surge after the early damage inflicted by the pandemic.
However, jobs remained a concern in the US over the month and supported the idea that the Federal Reserve may be waiting too long for their first interest rate cut. US employment data showed a slightly higher-than-anticipated unemployment rate in June of 4.1%, while average hourly earnings rose 3.9%.
The Chinese economy still looks relatively unattractive to foreign investors, as economic data disappoints
China noted a record $99bn (£76.4bn) trade surplus in June amid signs of importers bringing forward orders to beat higher tariffs on goods. Official figures from Beijing indicated exports expanded at the sharpest rate in 15 months, while the weakness of China’s domestic economy resulted in falling imports.
We have already seen higher EU import duties on Chinese electric vehicles (EVs) come into force earlier this month, and higher US tariffs on the same EVs, and other hi-tech products come into force on 1st August.
The latest inflation figures in China showed annual consumer price inflation dipped to 0.2% in June from 0.3% in May, despite Beijing’s measures to revive consumer demand.
In terms of China’s economic growth – an ineffective transmission of (cautious) policy easing efforts and the overhang of property weighed on the Chinese economy in Q2, with a seasonally adjusted real gross domestic product (GDP) reading of 0.7% quarter-on-quarter, despite the promising start to the year.
Summary
The sands shifted under investors’ feet over July, with the period now being dubbed ‘the Great Rotation’. The rotation came two-fold. First, markets were buoyed by prospects that central bankers could increase the amount of interest rate cuts, and there has been a broadening out of investment into interest rate-sensitive sectors, such as smaller companies and real estate. Second, investors have grown increasingly impatient with tech companies’ efforts to profit from their massive investments in Artificial Intelligence, triggering a rotation out of the names that had done so well previously. Consequently, smaller companies dominated returns in July by the widest margin in decades. July’s company updates raised more questions than answers, and investors eagerly await more news that could shed light on their trajectory.
For bond markets, it felt as though investors were finally rewarded for their patience as interest rate cuts came to the fore. With rate cuts being priced into markets, bond yields began to fall, and prices subsequently climbed. The ten-year UK government bond (Gilt) paid 3.97% at the end of July, compared with 4.17% the same time last month, while the ten-year US Treasury bond offered 4.03% compared with 4.4% at the end of June. The ten-year Japanese government bond stayed level for the month at 1.05%.
Away from traditional holdings, such as equities and bonds, we’ve seen a preference for alternative investments over the month. Geopolitical tensions rose, with the assassination of a Hamas political leader in Iran leading to Iranians promising to respond. When geopolitical tensions rise, one area that can provide a good hedge is Gold. Having started July at $2339 an ounce, the precious metal finished at another new record of $2494, also assisted by expectations of interest rate cuts.