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Financial markets were mostly weaker in July due to ongoing concerns about credit problems and heightened concerns about the slowdown in global economic growth.
US data were still weak and the consensus now expects several quarters of low to moderate growth. The Fed left rates unchanged at 2.0% in August, emphasising inflationary concerns and providing further evidence for markets that the US rate cutting cycle has now ended. In the other major economies, central bankers are shifting their focus from rising inflation to slowing activity. Japan and the UK left rates unchanged in June, however the European Central Bank increased official rates by 25bps in early July, as did a number of Asian central banks.
In Australia, further evidence of slowing domestic demand emerged. Despite ongoing high inflation, RBA concerns are now shifting to growth and markets are now expecting rates to be cut from September.
Equity markets were mixed in July, with most markets performing poorly in the first half of the month before recovering to have a stronger second half as oil prices eased. Performance of equity markets in July suggested that there are more aftershocks of the ‘credit crunch’ yet to be felt. Overall, the MSCI Developed Markets World Index fell 1.9% in July, with Germany and Hong Kong among the few markets to record gains, whilst emerging markets as a whole had a worse month, down 5.5%.
The US market steadied after early falls, with the S&P 500 down 1.0% over the month. Elsewhere, the ASX 200 had a weak month, finishing down 4.6% with energy stocks crashing 13.7% on the back of weaker commodity prices, while the European Stoxx was down 1.8%. In Asia, the Shanghai 180 rose 0.5% for July. The Hang Seng finished up 2.8%, while the Nikkei fell 0.8%. India’s Sensex Index was a strong performer in spite of interest rate hikes, up 6.6% while the Brazilian Bovespa took another tumble, down 9.2% for July.
Shifts in expectations about the future direction in interest rates dictated movements in bond yields for July. Japanese bond yields fell as warnings about slowing growth continued, down 6bps overall. US bond yields rose early as markets expected a rate hike, then fell as this looked unlikely, ending July unchanged. Indications that July’s rate hike by the ECB was a one-off saw European yields fall 23bps. Australian 10-year Commonwealth bond yields were driven downwards as speculation of a future rate cute increased, ending the month down 22bps at 6.23%.
The A$ had a weak performance in July, falling 1.8% against the US$, partly reflecting the increased likelihood of the RBA cutting interest rates soon. The A$ was also down 0.3% against the Yen, and also fell against the Euro (-1.0%) and Sterling (-1.6%), ending down 1.6% on a trade weighted basis. The US$ rose as oil prices eased, ending July up against the Yen (1.7%), Euro (1.0%), and Sterling (0.5%).
Commodity prices were universally weaker in July, as concerns about slowing global growth filtered through to commodity markets. Precious metals fell in July, with gold and silver down 0.6% and 1.0% respectively. Base metals were also lower, with copper down 5.9% as Peruvian strikes ended, while the nickel price fell 14.0% with weaker stainless steel production in China lowering demand. The end of July saw the Economist Base Metals Index down 0.4%, gas down 29.6% and the price of West Texas Intermediate Oil down 11.4%. Overall, the CRB index of commodity prices finished 3.7% lower in July.
Source: Access Capital Advisers Pty.Ltd
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