Neil Birrell, Premier Miton’s Chief Investment Officer, provides a monthly summary of the key events in financial markets.
For information purposes only. Any views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
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July – in brief, with an extra update on the market moves in early August
- It was a busy month for economic data watchers, with growth and inflation easing lower.
- Interest rates followed suit in some regions.
- Stock markets bounded around, but there were big moves within the markets that could become trends.
- Politics continues to stay in the headlines.
Economic growth can drive inflation, they both can drive interest rates (up and down)
Every month there is a huge amount of economic data published and central bank policy measures announced. They will be scrutinised much more in some months than others.
July (and including the first days of August) this year was one of those periods under intense scrutiny.
Simply put, we are at an inflection point for the world economy.
The key global interest rate is that of the US, given the size and importance of the economy. Interest rates started rising there at the end of 2021 to combat spiking inflation, a move that was replicated in many regions around the world. They moved sharply higher to the Federal Reserve Bank’s (Fed) target rate, a range of 5.25% – 5.5%, where they have stayed for two years.
As inflation has fallen around the world, we have been waiting for interest rates to fall as well.
We are now at that point, except recent economic data has suggested that economic growth is slowing, in the US and elsewhere.
Whilst all the data is not all pointing in the same direction at the same time in all regions, there is evidence of economic growth slowing.
Varying by region, this can be seen in the economic growth numbers themselves, with China being disappointing, employment data weakening and wage growth slowing.
This is not a clear, worrying trend for now, but it is notable.
We are also seeing what are known as “forward-looking indicators” weaken. These include the Purchasing Managers’ Indices (PMI), which are surveys of the spending intentions of companies in different sectors and regions around the world.
As a result, interest rates have started to fall; led by Switzerland, then Canada, then the European Central Bank, with the Bank of England joining the party on 1 August. Although the Fed chose not to buy a ticket at its meeting on 31 July, it did indicate that it would be likely to turn up in September.
However, concerns over interest rates not falling fast enough are turning into fears that a sharper economic slowdown might ensue, which is leading to volatility in prices of most asset classes, particularly bonds and equities (company shares) but also gold, industrial metals such as iron ore and crypto currencies. This volatility could continue as we seem to be at an inflection point in the economic cycle.
That came to a head with the employment data that was released in the US on Friday 2 August, which was weaker than expected. This led to concerns that the US economy is weaker than thought and that recession is a real possibility.
Coming so soon after the Fed had held rates, investors reacted immediately and aggressively by selling equities and seeking the perceived safety of bonds, in particular bonds issued by governments.
Furthermore, interest rate expectations changed, in that they would be cut more aggressively to provide support to the ailing economy.
Talking of inflection points…
Just as we have all that to worry about, in Japan they are putting interest rates up.
After decades of stagnating economic growth, there are now signs of life in the economy and the Bank of Japan (BoJ) has moved to increase the overnight interest rate.
It has been at 0.5% or below since 1995 and below 0% since 2016. The BoJ moved rates into positive territory in March this year and up to 0.25% at the end of July, also indicating there were more monetary policy tightening measures to follow. Now that is an inflection point.
Bank of Japan Overnight Call Rate
Source: Bloomberg 31.03.1987 – 02.08.2024.
Whilst we might have some idea this was all forthcoming, that doesn’t mean that investors won’t react to events and financial markets will move.
In fact, there is such a confluence of significant factors and rising uncertainty, it is not surprising to see big market moves, although the size of the fall in the Japanese stock market is startling.
So, what is happening and what might happen next?
Financial markets are driven by what is happening now, but also by changing future expectations.
To give examples of that; money markets and bond markets will move according to expected interest rate changes and equity markets will worry about recession hurting company profits.
As noted above, there are rising concerns over economic growth. Markets will react, in the case of equities, probably by falling – as they have done.
They will also move to expect central bank action to be taken in the future. That has taken place very quickly, just as it did around the time of the (so-called) banking crisis in the spring of 2023.
If those expectations are not met or change, markets will move accordingly. Simple, isn’t it! It can, however, lead to sharp movements in markets when events are moving quickly or changing. Hence, we are currently experiencing big moves in bond markets and, particularly, equity markets.
If I look back to June, equity markets were riding high, sentiment was good and investors were, broadly, positioned for a benign environment. That brings with it the risk that an unexpected negative event can lead to a sharp reaction as investors re-position.
We have that negative news in the US and Japan at the same time as the share prices of giant US companies falling: a confluence of events that have added up to more than the whole in their impact.
There is lots going on that might be long-term and fundamental in nature
If you have read, listened to, or watched any comments from me this year, you will have spotted common themes.
Firstly, the share prices of the huge US technology and communications companies, including Nvidia, Amazon, Meta (Facebook) and Alphabet (Google), that have become known as the Magnificent 7, along with other technology companies, specifically those associated with artificial intelligence (AI) have become expensive in the eyes of many and are attracting much debate, with risks to the downside for share prices.
It doesn’t for one minute mean I think they are bad companies, just that their share prices don’t reflect their prospects. Cleary, though, I could be wrong.
Secondly, in general terms, smaller companies, globally look attractive and thirdly, the UK overall looks attractive.
I am not the only one to think that, but more and more investors are coming round to that view; share prices are showing that to be the case.
However, all the factors discussed above and the volatility and day-to-day moves in share prices that have resulted, mean that, in the short-term, it is difficult to see a trend.
There is evidence of it starting and I think it will continue. This means that if you are invested in equities, it is very important to be in the right companies, sectors and regions; you want to be in the winners not the losers.
And finally…
July brought policy announcements from the new UK Government and news of a Budget coming at the end of October… and Donald Trump was shot at. The year of elections keeps providing stories and will do so to the end.
However, I do feel this note has had a bit of a negative slant and I don’t want to sign off on that note.
Overall, the world economy has proven to be robust and there is plenty of room for central banks to apply supportive policy measures.
Financial markets have been volatile and may remain so for a while, but that is normal and provides opportunities for active investors. Importantly, there are some great long-term opportunities to take advantage of, in my view anyway.
