Sabco® Investment's Monthly Market Report - July, 2024

Sabco® Investment's Monthly Market Report - July, 2024

July was a month of volatility as markets reacted to significant economic and political developments. Early in the month, the US Consumer Price Index (CPI) data came in weaker than expected, along with softer US labor market figures. These indicators reassured bond investors that the Federal Reserve (Fed) might soon begin cutting interest rates. Investors are now anticipating the first Fed rate cut in September and are currently projecting nearly three rate cuts in the US this year, with around 150 basis points worth of cuts expected by June 2025.

In this environment, interest-rate-sensitive asset classes showed strong performance. Small-cap stocks rose by 6.9% over the month, global Real Estate Investment Trusts (REITs) posted a solid 6.0% gain, and the Bloomberg Global Aggregate Bond Index delivered a 2.8% increase.

Developed equities showed a more modest return of 1.8% for the month. Growth stocks were notably weak, declining by 1.0% as investors became more cautious about the potential returns from investments in artificial intelligence (AI). Despite the downturn during the month, growth stocks have returned 16% year-to-date, contributing to a 14% year-to-date gain in broader developed market equities.

Commodities experienced a downturn, with the Bloomberg Commodity Index falling by 4.0% during July. Oil prices were a significant factor in this decline as the market considered the impact of weaker demand from China against supply concerns stemming from tensions in the Middle East.

In the US, earnings season progressed with four of the "magnificent seven" tech companies reporting results for the previous quarter. Overall, investors seemed unimpressed by the earnings reports, leading to pressure on the tech sector for most of July before a rebound at the end of the month. The S&P 500 rose by 1.2% over the month. With more than half of S&P companies reporting, over two-thirds surpassed analysts' expectations, indicating a resilient US economy and broader earnings growth. At the same time, investors began shifting towards small-cap stocks, which are more sensitive to interest rate changes. This shift resulted in the Russell 2000 outperforming the Nasdaq 100 by the largest margin in over 20 years.

UK stocks outperformed, with the FTSE All-Share index rising by 3.1% over the month. Strong service sector PMIs in July, along with better-than-expected economic growth in the second quarter, indicated improving economic momentum. The market's reaction to the general election was minimal, as a Labour victory was already expected.

European stocks lagged behind their US and UK counterparts, with the MSCI Europe ex-UK index returning 0.6% for the month. A disappointing Purchasing Managers' Index (PMI) reading suggested a slight slowdown in eurozone economic growth over the summer, coupled with uncertainties surrounding the French election, which likely contributed to the underperformance.

The Japanese TOPIX index underperformed last month, declining by 0.5%. This drop was partly due to weakness in global tech stocks, but the returns were also affected by a strengthening yen. Expectations of earlier Fed rate cuts, along with an interest rate hike by the Bank of Japan, led to a 6.5% appreciation of the yen against the US dollar, marking the strongest monthly move since June 2016.

Chinese equity markets declined last month, affected by ongoing challenges in the real estate sector and their impact on the broader economy. The MSCI China Index fell by 1.2% in US dollar terms. However, Chinese authorities implemented measures to provide liquidity support to the financial system, including cutting the reverse repo rate, a key short-term policy rate, and lowering the benchmark loan prime rate. These actions aim to stimulate lending and support economic growth amid ongoing market challenges.

In the US, the soft CPI data from June and a weakening labor market have increased investor expectations for Fed rate cuts in 2024 and 2025. This optimism boosted US Treasuries, which gained 2.2% over the month. The rally at the short end of the curve also caused the yield curve to steepen, with the spread between the 10-year and 2-year US Treasury yield narrowing to -21 basis points, its tightest level since January 2024.

In the UK, stronger-than-expected GDP growth in the second quarter, along with persistent services inflation, suggests that interest rate cuts may be more gradual compared to the US and Europe. UK Gilts underperformed, returning only 1.9% for the month.

In the eurozone, peripheral government bonds continue to outperform core bonds as investors seek higher yields in anticipation of further European Central Bank interest rate cuts. Italian and Spanish sovereign bonds returned 2.8% and 2.3%, respectively, with Italy maintaining its status as the top-performing major sovereign bond market year-to-date.

In Japan, the Bank of Japan continued to normalize monetary policy in July, raising its policy rate by 15 basis points to 0.25% and announcing plans to reduce the pace of Japanese Government Bond (JGB) purchases by 400 billion yen per quarter starting in August. Consequently, JGBs remained flat over the month.