What’s happened in markets?

FTSE All Share 0.61 -5.33 -6.23 -4.04 1.98 2.11 3.33
Euro Stoxx 50 1.76 -7.32 -7.00 -16.09 -9.11 2.73 3.45
S&P 500 1.98 -5.12 -12.76 -17.52 -8.44 11.24 11.92
Japan Topix 2.30 -4.06 -0.35 -3.96 0.66 8.67 5.68
MSCI Asia Pac. 1.11 -4.74 -7.45 -15.96 -21.32 2.84 3.55
MSCI Emerg. Mkts. 0.97 -6.18 -10.18 -17.41 -21.74 1.12 2.67
Jo’burg All Shares 4.12 -2.17 -8.25 -5.12 10.00 9.79 9.44
UK Gov’t Bonds -1.82 -1.17 -6.27 -14.17 -15.00 -3.96 -0.64
US Gov’t Bonds -1.08 -0.45 -2.42 -9.64 -10.33 -1.00 0.72
Global Corp. Bonds -0.29 -1.51 -4.67 -12.70 -13.29 -1.05 1.43
Emerg. Mkt. Local -0.68 -4.75 -8.36 -13.99 -16.89 -4.81 -1.20
Figures in the respective local currencies as at the end of trading on 08/07/2022.

Against a backdrop of increasingly negative US economic data, the week of 4 July saw a couple of pleasant surprises. The first of these was job growth – a key indicator of resilience against inflation – which rose by 372,000 in June, compared with the predicted 250,000. The second saw unemployment remain steady at 3.6%, the same level as May.

However, other data suggested growth in the US services sector is continuing to slow, albeit to a lesser degree than expected. The Institute for Services Management (ISM) index, for example, slipped to a two-year low of 55.3, although this was above the 54.3 economists had expected.

The data suggests interest rate hikes may be cooling demand, with Federal Reserve (Fed) officials keen to downplay the risk of recession as they flag their continual economic watch. However, one participant on the Federal Open Market Committee, San Francisco Fed President Mary Daly, noted that a Fed-induced recession is a possibility – an outcome factored into her outlook. The coming week will see further US key indicators published that should help us understand the current environment better, including the Consumer Price Index for June and the Fed’s latest Beige Book survey, formally known as the Summary of Commentary on Current Economic Conditions report.

In other news, Japan’s surprise fall in its household spending rate for May, where it dipped by 0.5% versus the anticipated growth of 2.1%, was overtaken by the assassination of former Japanese Prime Minister, Shinzo Abe. He was shot while campaigning for a national election in which voters went on to re-elect the ruling coalition that includes his Liberal Democratic Party.

There was also political drama in the UK as Boris Johnson was forced to resign as leader of the ruling Conservative party, following mass resignations from his Cabinet. He will remain as ‘caretaker’ Prime Minister while his party selects a new leader over the next few weeks.

That news triggered a slight appreciation in the value of sterling against the US dollar, although the greenback continued to perform strongly against other major currencies. Amid recession fears in the Eurozone, the Euro dipped to its weakest level since 2002.

In financial markets, all asset classes struggled as they were caught between fears of recession and the anticipation of further tightening action by the central banks. Similar returns were posted by both developed (-6.4%) and emerging market (-6.2%) stocks over the past 30 days. Value stocks took a bigger hit (-7.5%) than growth (-5.0%), while small capitalisation stocks (-8.5%) fared worse than large capitalisation (-6.0%) peers.

Recessionary fears caused a drop in oil prices, despite the continuing scarcity of supply, with 30-day returns slumping by -13.0%, reversing the 59.0% growth over the past year. This led the energy sector for equities lower too, down by -20.0% over a 30-day period. Global property stocks also continued to perform poorly (-5.6%), while the best equity performance any sector could manage was the -0.1% seen in healthcare. There were also major shifts in fixed income markets.

Latest Consensus Forecast
UK GDP (QoQ) 0.8
UK PMI 53.7
UK CPI (YoY) 9.1
EU GDP (QoQ) 0.6
EU PMI 52.0
EU CPI (YoY) 8.6
US GDP (QoQ) -1.6
US PMI 55.3
US CPI (YoY) 8.6 8.7

What’s happened in portfolios?

In the context of a challenging environment for equities, we are reducing our allocation to the risky asset class slightly. The main change will be in the portfolio mix, given we feel it is a good time to lock in the relative gains from our value position, and tilt towards quality-focused growth strategies.

The significant upward shift in yields has made fixed income more attractive. The current environment is less supportive for credit risk. We have reduced our overweight to high yield and have gradually increased the duration of our holdings.

Real assets remain attractive as an alternative to fixed income, with infrastructure of particular interest. Although we will be taking some profit in commercial property in the UK market, we continue to favour alternative strategies as a credible diversifier within portfolios.

What’s happening this week?

13 July • UK Industrial Production (May) | 14 July • US Producer Price Index (June) | 15 July • EU Balance of Trade (May)