Volume 1 Issue 3, July
Global equity markets experienced a very strong month in July, with many developed markets including the US hitting new record highs. Even the largest markets posted very strong returns, gaining between 1.5% (Germany) to over 2% (Japan, US). A strong bounce in commodity prices sent exporters sharply higher. Chile (+9.1%), Nigeria (+9.7%), Brazil (+10.7%) and Norway (+11.4%) were the best performing markets. Certain net importing EM countries (Egypt, Indonesia and Malaysia) lagged their global counterparts and were the worst performers. Strong equity markets coincided with VIX falling to new lows, down to around 9% near month-end which is the lowest since the index was introduced.
Global Fixed Income
Long term rates in most markets were flat to lower over the month, as the prospects for tightening in developed markets seem to be put off to later in the year. Yields in relatively high rate EM countries dropped the most, with the Brazil 10-year falling 52bp and South Africa recovering slightly from the recent ratings-related turmoil, falling 18bp. The large moves in commodities in July seemed to drive performance in rates for certain market as well, with yields in a number of exporters rising modestly—among them, Australia (+11bp), Russia (+13bp), Nigeria (+19bp) and Canada (+30bp).
Americas US Q2 GDP rebounded but came in slightly below expectations, while a better-than-expected jobs report reinforced positive sentiment on the broad economy. The Federal Reserve held rates steady but raised the topic of beginning to reducing its portfolio, which is still sitting at over $4 trillion after its aggressive purchases of fixed income securities following the financial crisis. While the Fed has not been aggressively buying in recent years, it has reinvested the interest, which has kept its balance sheet from shrinking significantly. US President Trump reiterated his desire for a cut in corporate tax rates. About half of S&P 500 companies reported earnings and aggregate profit is expected to grow at about 10% vs. the same period last year, with top-line rising a respectable 5%.
EMEA The ECB kept rates unchanged and Draghi said the bank did not discuss reducing its pace of asset purchases during the July meeting, but would reconsider the issue later in the year. Relatively easy monetary conditions were affirmed when Greece returned to the sovereign bond market for the first time in three years.
Asia Moody’s upgraded its China bank sector ratings outlook to stable from negative, after regulators took steps to tighten conditions in the shadow banking sector and the previously rapid growth of NPLs began to level off. China GDP growth beat expectations, which helped boost commodities. The BOJ had a monetary policy meeting and kept rates on hold.
Commodities and real estate outperformed even the ebullient stock markets. Global real estate funds rose more than 3%, copper was up over 7% and crude oil rose by nearly 10% in July.
US, China and Brazil helped drive the equity portfolio to outperformance as the biggest contributing markets, while Egypt and Indonesia subtracted the most. India, South Africa and Brazil were the biggest equity contributors to the bond portfolio in the month, while Egypt, China and Canada were the largest detractors.