Equity markets: summer on the stock markets
In July, stock markets realized the most robust monthly performance since November 2020 when the first Covid vaccine was announced. Several elements contributed to the rebound in prices. While the Federal Reserve raised its policy rate by 75 basis points, at the same time, it signaled that the pace of interest rate increases might slow if the economy requires it. In addition, the earnings season got off to a pretty good start, both in the U.S. and Europe. Several big names posted better results than expected, including in the technology sector, but there were also notable setbacks (e.g. Walmart). The rally was led by growth stocks, a trend that continued in an almost identical fashion in the U.S. and Europe. The combination of lower interest rates and fears of economic growth caused growth stocks to outperform value stocks by more than double.
During last month's rebound, U.S. stock markets outperformed other regions, including in dollar terms, thanks partly to the higher weighting of growth stocks in stock market indices. In Europe, the gas and Italian political crises weighed on confidence, but European stock markets were nevertheless able to post a solid performance. After a strong performance in previous months, Chinese equities now underperformed. The flare-up in the Covid infections and the associated lockdowns have led to a downward revision of growth expectations, while the risks in the Chinese real estate market are becoming more acute. Property developers are facing financing difficulties that keep construction projects from being completed. Disgruntled buyers have therefore turned to a cessation of monthly installments.
|MSCI EMU NR||7.3%||-2.0%||-12.8%||-8.8%|
|MSCI EUROPE NR||7.6%||-1.5%||-7.3%||-1.3%|
|MSCI USA NR||12.1%||3.4%||-4.1%||7.8%|
|MSCI JAPAN NR||8.4%||2.4%||-6.0%||-0.3%|
|MSCI EM. MARKETS NR||2.3%||-3.2%||-8.4%||-7.1%|
|MSCI AC WORLD NR||9.7%||1.5%||-4.8%||4.1%|
Bond markets: sharply lower long-term interest rates
Bond yields in July continued the downward trend that began in mid-June. Fears of an excessive cooling of economic activity remain evident in the market. U.S. 10-year yields fell from 3.5% in mid-June to 2.65% at the end of July, while German 10-year yields fell from 1.75% to 0.85% over the same period. U.S. 10-year yields fell below 2-year rates. Some consider a so-called inverse yield curve to signal an impending recession.
The fall of the Draghi government and political uncertainty caused the interest rate spread on Italian government bonds to widen again, to 225 basis points at the end of July. Early elections are coming up on September 25, and polls indicate a possible coalition of right-wing and far-right parties. As a result, there are fears that the new Italian government will abandon fiscal discipline.
Euro corporate bond spreads (both investment grade and high yield) narrowed somewhat in July after their sharp jump in recent months. Increased risk appetite in the market and higher interest rates have renewed investors' interest in corporate bonds.
Central banks: accelerated normalization of monetary policy continues
The Federal Reserve raised its key interest rate for the fourth consecutive time this year. As with the previous increase, it was 75bps, bringing the range to 2.25-2.50%. This action was widely expected. More importantly, the Fed indicated that subsequent increases could be at a more moderate pace. That was generally seen as a dovish prospect and welcomed by the markets. The market expectation for the three remaining meetings this year is 50 basis points in September and 25 basis points each in November and December. According to current expectations, this would then be the last interest rate increase in this cycle.
The European Central Bank raised the deposit rate by 0.50%, ending the era of negative interest rates. Any future interest rate increase will depend on the development of the economic situation and inflation. During the meeting, the ECB revealed the details of its new anti-fragmentation tool. One of its main features is that the ECB could activate this instrument to buy bonds from distressed countries. Admittedly, the significant deterioration in financing conditions must then be unrelated to the macroeconomic fundamentals of the country in question.
Moreover, the countries that wish to benefit from this assistance must meet several conditions. One of these is compliance with EU fiscal rules, which are expected to come back into force in the coming years after being suspended during the Covid period. However, what criteria the ECB will use to trigger this mechanism remains unclear for the time being.
|Fed funds||2.25-2.5%||+0.75%||July 2022|
|ECB deposit rate||0.0%||+0.50%||July 2022|
Currencies: euro weaker
The euro weakened against most other currencies. The gas crisis heightened fears of a recession later this year, while the political turmoil in Italy weighed on confidence. In mid-July, the dollar just reached parity with the euro. In the second half of the month, the euro recoup some of its losses following the ECB's announcement of its new anti-fragmentation tool. The Federal Reserve's more relaxed stance on future interest rate hikes also contributed to a stronger euro and weaker dollar at the end of the month.
The other dollar currencies (AUD, CAD, and NZD) also strengthened against the euro. The central banks of the three countries raised their policy rates during the month, and Canada's central bank even by 100 basis points at once.
After the Swiss franc had already reached one against the euro last month, the currency rose further during the month and became 2.8% more expensive. The Norwegian and Swedish krona strengthened against the euro (4.2% and 3.2%, respectively). Norway's higher-than-expected July inflation rate allows for an accelerated pace of interest rate hikes.
Overall, emerging market currencies continued to perform relatively weakly in a context of a strong dollar. However, there was some recovery in the second half of the month, except for the Turkish lira, which lost further ground.
Commodities: downward trend continues
The Brent oil price briefly fell below 100 dollars per barrel during the month. As a reminder, the peak in March was $128. The moderation of oil demand in the event of a recession in Western economies continues to weigh on the price. Nevertheless, at the end of the month, the price was able to recover somewhat.
The European gas price briefly fell to 150 euros per Mwh after Russia resumed gas supplies following maintenance work on the Nord Stream 1 pipeline. Then, after a new reduction in supply, the price rebounded to 200 euros per Mwh, up by a third in one month.
The prices of industrial raw materials continued their downward trend in July. For example, the copper price dropped to 7,000 dollars per ton in mid-July (compared to more than 10,000 dollars just three months ago). However, in the second half of the month, the copper price recovered somewhat after several producers downgraded their production forecasts for the rest of the year.
Gold continues to struggle. The stronger dollar and higher short-term interest rates are weighing on the price. In addition, investors' overall risk appetite improved somewhat, diluting interest in safe-haven investments