Monthly Market News July 2023 – Trends in the markets

Alexandre Gauthy - Economist

Investor optimism continued last month. Risk sentiment remained robust as US economic data were generally better than expected, while the disinflationary trend continues.

Our expert, Alexandre Gauthy, analyzes the trends in July 2023.

Equity markets: Positive stock market trend continues in July

Equity markets were positive across the board in July. The US stock market took the lead as economic data left open the possibility of the "soft landing" scenario, while confirming cooling inflation. The S&P500 thus recorded its fifth consecutive positive month. Emerging market equities (and Chinese equities in particular) also performed well, after underperforming strongly for several months, following announcements of new support measures by the Chinese government to support the real estate sector and boost consumption. European equities lagged slightly behind other regions, but the Stoxx Europe 600 nevertheless also reached its highest level since early 2022. Economic data were on the disappointing side and second-quarter corporate earnings releases in Europe were uninspiring. While corporate results in the US also showed fewer positive surprises than previous quarters, the outlook for the coming quarters was seen as rather encouraging.

On the sectoral front, cooling inflation and sustained growth ensured that market gains were more broad-based than in the first few months of the year when the rally was mostly limited to tech stocks with a link to artificial intelligence. Cyclical stocks performed relatively better than defensive stocks, especially in Europe. Real estate was the best-performing sector, after a previous sharp underperformance, due to the stabilizing interest rate outlook. Commodity shares were boosted by hopes of stimulus measures from China.

Equity markets	July	3 months	Since 31/12	12 months
MSCI EMU NR	1.9%	3.2%	17.5%	17.9%
MSCI EUROPE NR	2.0%	1.8%	13.3%	10.6%
MSCI USA NR	2.3%	11.1%	17.0%	4.1%
MSCI JAPAN NR	1.9%	9.4%	12.7%	6.5%
MSCI EM. MARKETS NR	5.1%	8.5%	7.9%	0.2%
MSCI AC WORLD NR	2.6%	8.6%	14.3%	4.4%
(Performances in EUR dd. 31/07/2023)				(bron: Bloomberg)

Bond markets: Volatility, but upward interest rate trend remained limited

US bond yields in July were driven by alternating investor moods regarding future monetary policy. Sequential figures (labor market, inflation, GDP growth, ...) blew hot and cold on the persistence of inflation and the implications for the Federal Reserve's "higher for longer" policy rate scenario. The 10-year rate went above 4% again and the 2-year rate, more in sync with market expectations for short-term rates, again rose above 5% during the month. European 10-year yields followed a similar trend, but on balance the German benchmark rate continued to hover around 2.5%.

Japanese 10-year bond yields reached the highest level since September 2014 following the Bank of Japan's announcement to introduce greater flexibility in the policy of yield curve control.

Corporate bond spreads moved noticeably lower in July for both investment-grade and high-yield bonds, with the better investor sentiment we see for the more cyclical (and thus slightly riskier) segments of the equity market also feeding through to corporate bonds.

Government Bond Yield 10 yr	Current	July	3 months	Since 31/12
Belgium	3.13	0.08	0.13	-0.09
France	3.02	0.09	0.14	-0.09
Germany	2.49	0.10	0.18	-0.08
Italy	4.10	0.03	-0.07	-0.61
Greece	3.76	0.09	-0.42	-0.86
Spain	3.52	0.13	0.16	-0.15
United States	3.96	0.12	0.54	0.08
Japan	0.61	0.21	0.22	0.19
Evolution until 31/07/2023				Source: Bloomberg

Central banks: Bank of Japan modifies yield curve control after all

After a pause in June, the Federal Reserve raised its key interest rate by another 25 basis points in July as expected, bringing the target range for policy rates between 5.25% and 5.50%, the highest level in 22 years. While Fed members are considering a final increase later this year, markets believe the peak of the cycle has been reached.

The ECB raised deposit rates as expected by 25 basis points to 3.75%, the ninth consecutive tightening. But the central bank removed the prospect of a rate hike from its forecasts, paving the way for a possible pause in September. Clearly, the deterioration in the growth outlook pushed the ECB into a fully data-dependent mode. No change in the central bank's balance sheet deleveraging was announced.

Last month's eye catching news concerned monetary policy in Japan. The Bank of Japan announced "a more flexible control of the yield curve, with the upper and lower limits of the bandwidth in market operations considered as reference rather than rigid limits". It means the Bank of Japan will allow the 10-year rate to rise above the 0.5% ceiling - which it says it will maintain "just in case" - to reach a new ceiling of 1.0%.

Central Bank Rates	Current	Latest adjustment	Date
Fed funds	5.25-5.5%	+0.25%	July 2023
ECB deposit rate	3.75%	+0.25%	July 2023
Situation on 31/07/2023			Source: Bloomberg

Currencies: Volatile US dollar

The dollar weakened significantly in the first half of July, from 1.085 to 1.125 against the euro. Encouraging inflation data and cooling labor market brought the end of the tightening US interest rate cycle a little closer. Subsequent economic data that were published (better-than-expected Q2 GDP growth figures) drew investors' attention back to the government bond yield differential, which widened in favor of the dollar. On balance, the dollar weakened only slightly against the euro over the past month.

The Norwegian krone strengthened by almost 5% against the euro in July, after almost a year of currency weakening. A higher-than-expected inflation figure, with core inflation in particular, coming out higher than expected, left the door open for more interest rate hikes by the Norwegian central bank. The rise in oil prices is also supportive for the Norwegian krone.

The Japanese yen firmed after the Bank of Japan's announcement on Yield curve control easing, but the currency saw some of the gains already melt away.

Currencies	Current	July	3 months	Since 31/12
USD	1.101	-0.9%	0.1%	-2.8%
GBP	0.856	0.4%	2.4%	3.3%
JPY	156.43	0.6%	-4.2%	-11.4%
CHF	0.957	2.0%	2.9%	3.3%
Evolution versus EUR until 31/07/2023				Source: Bloomberg

Commodities: Oil and industrial metals prices higher

Oil prices advanced sharply in July (Brent + 14.2% in USD), starting from a level at the end of June that was the lowest since December 2021. The upward trend was boosted by factors such as production restrictions in Saudi Arabia and Russia, a resilient US economy and possible stimulus measures in China. These elements suggest that the oil supply and demand situation will be more balanced in the second half compared to the first six months. On the negative side, slower global growth and possible rising Iranian and Venezuelan volumes continue to keep oil prices in check.

Industrial metal prices also developed positively in July. The price increases were fairly general. Commodity prices rose on hopes of new Chinese fiscal stimulus and a "soft landing" in developed economies. Even after the recent announcement by the Chinese Politburo, it remains unclear whether these measures will be enough to provide a real boost in activity.

The gold price rose slightly in July. Expectations that central banks in developed countries are now very close to the end of their monetary tightening cycle helped support the price.