Market Opinion - July 2022

Market Opinion - July 2022

July witnessed a positive shift for several equity markets globally, though challenges persisted. Here's an overview of the key developments during the month:

Europe:

European equities experienced their best monthly performance of 2022 in July. The region's gross domestic product (GDP) surpassed initial estimates, driven by strong tourism figures in Spain, Italy, and France. Inflation reached a new record high of 8.9%, leading the European Central Bank to raise interest rates by 0.5% for the first time in over a decade.

UK:

UK equity markets also ended the month on a positive note, achieving their strongest performance of the year. GDP grew by 0.5% between April and May. The political landscape experienced upheaval as Prime Minister Boris Johnson announced his resignation, with Rishi Sunak and Liz Truss emerging as the final two candidates for his successor. Inflation remained high, hitting a 40-year high above consensus. The Bank of England adopted a stricter stance on monetary policy, signalling the possibility of a further 0.5% interest rate increase in August.

US:

The US market saw an upward trend in July, partially driven by expectations of a more accommodative monetary policy from the Federal Reserve. The Fed remained committed to a 0.75% interest rate hike, aiming to combat rising costs. Speculation about a technical recession arose due to two consecutive quarters of negative growth, although the low unemployment rate presented a contradictory picture.

Asia:

Asian markets experienced marginal gains but lagged behind the developed world. China and Hong Kong underperformed, offsetting gains seen in other regions. China faced macroeconomic concerns despite positive reopening prospects post-COVID, leading to a downward revision of the estimated 2022 GDP target. Taiwan's technology sector led a recovery after a volatile start, while India emerged as the top performer, with all sectors, except energy, posting positive gains.

Emerging Markets:

In a departure from recent performance, emerging markets significantly underperformed other regions. However, they experienced a rally in the latter half of the month as sentiment in China improved. Latin America advanced, with Argentina and Chile leading the way. Mexico and Colombia were the only countries that retracted. Emerging markets in Europe, the Middle East, and Africa (EMEA) outperformed the broader region, with Qatar and Saudi Arabia being the biggest gainers.

Fixed Income:

After a challenging period, fixed income markets showed signs of recovery in July. Both sovereign and corporate markets rebounded strongly. Corporate bond markets experienced a shift in sentiment, with gains seen in the UK, eurozone, and the US for both investment-grade and high-yield bonds. The US, Germany, and the UK saw declines in their 10-year instruments due to the technical recession.

Environmental, Social, and Governance (ESG):

The energy crisis remained a focal point as countries prepared for the expected shutdown of Russian gas and its implications for domestic energy grids. The EU released plans to reduce gas demand, safeguard supplies, and explore alternative fuels. Other countries, like France and the UK, also pursued energy reforms to support decarbonization and energy security.

Overall, European, UK, and US markets experienced positive movements, while Asia and emerging markets faced challenges. Inflation, interest rates, political changes, and geopolitical tensions remained key factors impacting market performance.

The UK equity market ended on a positive note, experiencing its strongest monthly performance of the year. This was driven by early positive earnings reports from various companies, which outweighed concerns about economic slowdown.

In the midst of turmoil and mass resignations within his government, Boris Johnson announced his resignation as the Conservative leader. He will continue serving as the UK prime minister until his successor is chosen. The contest for the new leader has narrowed down to Rishi Sunak and Liz Truss, who will campaign to win the votes of Conservative party members. The decision on the new prime minister will be made on September 5, 2022, with recent polls favouring Liz Truss among Tory members.

UK inflation reached a 40-year high in June, with a rate of 9.4%, up from 9.1% in May. The increase was primarily driven by food and energy prices and slightly exceeded consensus forecasts. Andrew Bailey, the governor of the Bank of England (BoE), hinted at the possibility of a half-percentage-point interest rate hike in August as the central bank adopted a stronger stance on inflation.

According to data from the Office for National Statistics (ONS), the UK economy experienced growth in May, with a 0.5% increase in gross domestic product (GDP) between April and May. Previous months' GDP figures were also revised, showing a 0.1% expansion in March and a milder contraction of 0.2% in April. These results exceeded expectations, reflecting a rebound across all major sectors.

The impact of high inflation in the UK was evident in retail sales, business activity, and consumer confidence, raising concerns about a potential economic recession this year. Retail sales volume in Great Britain declined for the second consecutive month in June, as consumers reduced spending due to high inflation. A research company, GfK, reported that UK consumer confidence remained at its lowest level since 1974, with a reading of -41 in July.

Interest payments on UK government debt reached a record high in June, with public sector borrowing exceeding the previous year's levels for the first time in the year. Debt interest payments rose to £19.4 billion, an increase of £10.3 billion compared to June of the previous year. This represents the highest level of debt interest payments since records began in 1997, as reported by the ONS.

In the US, equity markets saw positive movement in July, with the NASDAQ and S&P 500 outperforming global markets. The Dow Jones Industrials index also recorded solid gains. However, concerns about high inflation, rising interest rates, and slowing economic growth remained in the background. The positive performance was largely driven by strong earnings reports as the US earnings season reached full swing. Investors discussed the possibility of a softer monetary policy response due to increasing recessionary risks.

US inflation remained at a 40-year high, with the year-on-year headline Consumer Price Index (CPI) reaching 9.1%. The US Federal Reserve continued to raise interest rates as expected, with a total increase of 225 basis points in 2022 so far. The Fed remained committed to fighting rising costs and containing inflation. However, this rate hike raised concerns about the US economy potentially moving closer to a recession. While some experts argued that two consecutive quarters of negative economic growth in Q2 (-0.9%) qualified as a technical recession, others pointed to the strong labour market with an unemployment rate of 3.6% and the creation of 372,000 new jobs in June.

The US housing market continued to be impacted by the higher interest rate environment and the Fed's efforts to combat inflation. Supply chain issues initially caused a slowdown in housing activity, but rising home prices and increasing mortgage rates further contributed to the cost of.