July 2023 Market Insights
Developed markets continued their recent strong as the U.S. economy remains robust with growing sentiment of an economic ‘soft’ landing as the interest rate tightening cycle comes closer to the end.
Written by Kevin Hua Co-founder & Chief Investment Officer
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What happened to the markets in July?
Developed markets continued their recent strong as the U.S. economy remains robust with growing sentiment of an economic ‘soft’ landing (cooling inflation without triggering a recession) as the interest rate tightening cycle comes closer to the end.
The strongest positive performers were Hong Kong’s HSCEI Index and HSI Index, up +7.38% and +6.15% respectively and followed closely by the U.S. Russell 2000 Index, up +6.06% (local prices). Only Japan’s Nikkei 225 Index, down -0.05% (local price) experienced a down month.
The strength of the AUD by +0.79% against the USD AUD returns for the Trends and indices.
U.S. economy no longer concerned about recession
Although the U.S. Federal Reserve raised interest rates 0.25% to a benchmark rate of between 5.25% and 5.50%, there is growing expectation that we are nearing the end of the tightening cycle, with potentially one more hike left for 2023 followed potentially by interest rate cuts in 2024 depending on the state of inflation.
Economically, the U.S. market was driven by corporate earnings and more optimistic outlooks as business investment and consumption remaining strong, therefore underpinning economic growth. GDP growth in 2Q 2023 came in at 2.4%, topping estimates for 1.8% and up from 2.0% growth in 1Q 2023 while annualised U.S. inflation rose was 3.0%, its slowest pace in more than two years, supporting the ‘soft’ landing thesis.
European markets remain mixed as inflation appears to have peaked
European markets also performed relatively strongly as inflation fell and positive economic growth, as GDP rose 0.3% in 2Q 2023 from the last quarter.
Inflation fell to 7.9% in the U.K. although it has fallen from recent highs, while headline inflation in the European Zone fell to 5.3%. The European Central Bank raised rates again (+0.25% to 3.75%).
Despite some easing inflation fears, the economic outlook in the U.K. remains mixed with a number of indicators showing little growth.
Chinese economy remains vulnerable, but Japan’s economy is positive
Although Chinese markets rallied, global investors remain concerned about the growth and slowing trends in China. The Chinese government announced further measures to help economic activity in the real estate sector as well as boost consumption and investment in other industry segments. However, such measures remain tempered.
In Japan, markets were muted after a strong recent rally. Quarterly earnings results were generally solid, but investors remain wary about the Bank of Japan’s stance on interest rate rises. There were also continued improvements in the Japanese macroeconomic data such as consumption, wage growth, and resilient inflation.