This August 2024 market update is brought to you by Marlborough Investment Management

Politics on both sides of the Atlantic influenced markets during July as central banks around the world wrestled with inflation data and currency valuations to set interest rates. Equity performance varied across regions, while fixed interest performance surprised positively.

UK

Swiftonomics?

Annual inflation was steady in June at 2%, this was the same as last month, but above expectations. This was largely due to the relatively high cost of restaurants and hotels, with many suggesting a “Taylor Swift effect” following the singer’s recent concerts.

The UK general election was held on 4th July and saw the Labour party take an overwhelming majority. The result was largely anticipated so does now offer an element of political stability.

US

Biden out, Harris in

July was dominated by politics, with President Biden announcing that he will not stand to be re-elected. The Democrats quickly rallied around Kamala Harris, who has gained support and is expected to receive the party nomination.

Polls have reduced Trump’s chances, and it looks like the race to the White House will be a close one. Whilst this uncertainty may provide some volatility in the short-term, political changes usually have little impact on long-term market performance.

The US had an inflation print lower than expected, with month-on-month core inflation at 0.1% in June, below market expectations and below the 0.2% May figure. Markets have seized upon this and now expect the Federal Reserve (Fed) to cut interest rates in September.

The challenge is that not all data has been pointing to a slowdown – GDP growth remains robust, with the economy growing an at annualised 2.8% in the second quarter of 2024, higher than the 2.0% estimate.

Unemployment and jobless claims have increased, but not significantly. Company earnings season is well underway, and there have been some disappointments. Largely companies are still beating estimates, but by less than last quarter.

Markets are realising that the expected revenue and growth from artificial intelligence (AI) may take longer than expected to feed into profitability.

Europe

On hold

After a rate cut in June, the European Central Bank (ECB) kept interest rates on hold in July as widely anticipated, with any decisions on rate cuts dependant on economic data and inflation trends.

Inflation ticked up slightly in July to 2.6%, above both expectations and June’s figure of 2.5%. This was driven by an increase in energy prices.

On the political front, July saw a snap election in France called by Emmanual Macron, and the National Rally party under Marine Le Pen won the first round. However, a left-wing coalition was formed and won a shock victory in the second round. No party won an overall majority – leaving the country with a hung parliament.

Japan

Land of the rising rates

The Bank of Japan raised interest rates to the highest level since 2008 at the end of July. The Yen strengthened by 1.7% against the US Dollar following this hike.

Inflation is still above the target of 2% but data suggests there is weakness in the Japanese economy. Equities delivered positive returns in July.

Asia and Emerging Markets

Some good, some bad

Chinese equity markets fell again in July, due to continuing issues with the housing market and the knock-on effect this has on Chinese consumer confidence.

Chinese authorities have implemented measures to improve liquidity, including cutting interest rates, after what was a fairly uninspiring Third Plenum.

Indian Equities, meanwhile, have continued their surge due to continuing strong domestic flows and are now up 21% year to date despite eye-watering valuations. The Indian market is rapidly closing in on China as the largest Emerging Market, now around 20% of the MSCI Emerging Markets, versus China at around 25%. In 2020, the weights were 9% and 35% respectively.

The Taiwan market, dominated by just one stock, Taiwan Semiconductor Manufacturing Company (more than half the index), has performed poorly in July, due to the shine coming off the recent Tech/AI rally.

Fixed Income

Bonds on the move

The bond market rally which was nascent in June matured in July. As an indication of the magnitude of the move, the benchmark US 10-year Treasury note saw its yield decline by 50 basis points (bps) over the course of the month. Other major bond markets moved by similar amounts meaning that bond prices increased significantly.

In terms of incoming news and information what was notable was how little the general tone of new information changed versus the prior period.

Incoming macro-economic data largely supported the increasingly popular notion that we are in the midst of a normalisation of labour markets and inflation dynamics despite economic growth in general holding up OK. In that respect the move lower in yields was somewhat surprising, in magnitude, if not direction.

Ultimately, what investors are increasingly recognising is that the tone emanating from central banks is shifting more significantly towards concern about potentially keeping interest rates too high, for too long and thus generating unnecessary damage to economies.

The fact that inflation, at least at the headline level, is close to target across most developed market economies is allowing monetary policymakers to begin reacting to the gentle rise in unemployment we are witnessing so that it does not become a more dramatic increase.

The effect of this subtle shift will be to somewhat lower the importance of backward-looking economic data in favour of a more forward-looking approach to monetary policy decisions but more importantly for investors it will significantly shift the perceived downside of owning fixed income securities and thus should see bond markets increasingly well supported through the rest of the year.

The Fed did meet at the end of the month, and declined to increase interest rates, but their statement very much confirmed the shift described above.

Japan continues to be a significant global outlier. Above-target inflation, robust growth, historically high wage growth and significant economic, social, and political concern about the pernicious effects of a weakening yen, all combined to push the Bank of Japan to increase interest rates.

The hike was only 15 bps and takes the policy rate to a mere 0.25% but alongside their decision to reduce the rate at which they buy government bonds in the years ahead, strongly suggests further tightening is likely.

As a result, Japanese government bonds (JGBs) underperformed versus other markets and the Japanese yen appreciated strongly over the month.

Source: Morningstar Direct