On the face of it, there appeared to be little change in the geopolitics and macroeconomic environment during the month of July compared to June, yet these proved to be very different months.
Inflation hit new highs; Russia’s invasion of the Ukraine continued unabated, with no let-up in the energy politics, unsettling Europe’s status quo; the China/ Taiwan question remained a very real cause of geopolitical concern; and there was increased uncertainty in Western politics, particularly in the UK and Italy, as well as pressure on President Biden, politically and economically.
The US is now in a technical recession after two negative quarterly contractions, falling 0.9% in the second half after dropping by 1.6% in the first half, while inflation stands at 9.1%. In Europe, Eurozone inflation is at an all-time high of 8.9%, up from 8.6% the previous month, with core inflation (that strips out fuel and energy sectors) at 4%. And in the UK, inflation stands at 9.4%, its highest level for 40 years.
Despite these headwinds, markets took much of this in their stride to rebound from the previous month’s lows. Whether this means a global recession can be avoided remains to be seen, although most economists still believe that this to be the most likely scenario given rising fuel costs, the ongoing uncertainty and severity of supply chain problems. During the month, EY-Parthenon warned that UK inflation could even hit 15% this winter, a figure that will ratchet up the pressure on the Bank of England.
Negative market surprises were reasonably contained in July, helped by the more favourable comments from Fed chair, Jay Powell, that it could be “appropriate” to slow future rate rises. In the UK, money markets are expecting a further 0.5% base rate rise on 4 August to 1.75%. In the EU, the ECB raised rates for the first time in more than 11 years, up 0.5% to 0.0%, and expects more to come.
In this environment, equity markets somehow had a stellar month. This was, in fact, their best for over two years. While the news has not been great, it has not been as bad as it could have been… all very worrying that this is what we are hanging our hats on! There was comparatively little volatility, with the VIX closing the month at 21.33 and staying under 30 throughout the month. Whether it is a dead cat bounce after the dire June and first half year numbers, only time will tell. Global recessions have a habit of not always following a downhill slope, but instead are interspersed with short sharp rallies.
The S&P 500 closed the month up over 9%, while the tech heavy Nasdaq fared even better, up almost 12.5%, which was its best monthly return since April 2020. In the last week of the month, both Amazon and Alphabet share prices rose as they easily outperformed revenue estimates, up 10% and 7.4% respectively. Unsurprisingly, given record oil prices, ExxonMobil and Chevron recorded their highest ever quarterly profits, as did Shell in the UK, which announced a $11.5 billion profit for the second quarter. In fact, earnings were generally above expectations in the US and by the end of the month, according to FactSet data, 86% of S&P 500 stocks were in positive territory. In the UK, the FTSE 100 was up 3.5%, in Germany the Dax was up 5.5% and in Japan the Nikkei 225 was up 7.2%.
In currencies, GBP had a stronger second half of the month against the USD but closed relatively unchanged for the entire month. The EUR weakened by around 2.5% against the USD, dragged down by Ukraine and concerns about growth. And in Japan, JPY strengthened by 1.7% against the USD. The worst performing currency was the RUB, which was down more than 16% in July.
Commodities were mixed. Wheat and oil were down, but natural gas prices were up over 50% as Russia constrained supply and German benchmark power futures hit new highs. Gold was marginally down 2.3%, while silver was slightly up.
Crypto had a far better July, with market participants hoping that this marks a turnaround from the worst of this year’s downturn. Bitcoin is once more closing in on $24,000 and is up almost 20% in July, while Ether is up almost 60% for the month and is now back to where it was in early June.