Market insight July 2024
July saw a change of political power in the UK, but despite all the noise in the lead up to the general election, financial markets did not react significantly, given that a Labour victory had already been priced in. Overall, it was a relatively volatile month as growth and defensive assets grappled with some key political and economic news. Commodities were weaker, driven by oil prices, as the market assessed the impact of lower demand from China countering the supply issues arising from continued hostilities in the Middle East.
The economic picture
Starting with the US economic news, weaker labour market and Consumer Price Index (CPI) data reassured defensive asset investors that the Federal Reserve is likely to reduce interest rates in the next few months, starting a downward trajectory of rates into 2025. The UK saw stronger than expected economic growth for the second quarter and healthy service sector PMIs in July, helped the overall economic picture. In Europe, the news was less positive due to uncertainties around the French election and disappointing Purchasing Managers’ Index (PMI) figures over the month.
As August started, the Bank of England (BoE) reduced interest rates from 5.25% to 5%, the first drop since the onset of the Covid pandemic in March 2020. The BoE’s rate setting committee, voted by a majority of five to four to reduce the rate. However, this was widely anticipated by financial markets.
Growth assets
Turning to US growth assets, after helping to drive equity markets so far this year, growth stocks were especially weak, as investors grew more cynical about the expected returns from artificial intelligence (AI). This was not helped by four of the ‘magnificent seven’ reporting results that disappointed some investors. With over 50% of major US companies having reported, one of our key messages at the start of the year appears to be playing out. A ‘broadening of earning returns’ is being seen, as over two thirds of these reported major US companies have beaten analyst expectations.
UK and European growth assets performed in line with their differing economic pictures, whilst Japanese equities were held back by the yen appreciating against the dollar, on the back of recent Bank of Japan rate hikes and the prospects of lower rates in the US.
Looking at the performance of factors, unsurprisingly the news on growth stocks impacted the growth factor. Interestingly, the expectation of a near term cut in rates from major central banks saw more positive sentiment to the small-cap factor.
Defensive assets
Looking at defensive assets, the UK 10-year gilt yield dropped sharply towards the end of the month, ahead of the expected decline in interest rates on 1st August. This was mirrored in the respective US yield. In the credit markets, investment grade bonds outperformed their high yield counterparts.
Market insight July 2024 – summary
In summary, July was a volatile month for financial markets. Weaker inflation and labour market data from the US intensified expectations of rate cuts but there is a near term risk that bond markets may have moved too quickly. However, the broadening of earnings returns in the US was welcome news and the overall message continues to be the same – maintain a broadly diversified portfolio of assets as this market volatility continues.
