Lately the attention in financial markets has been shifting to the consequences of the war in Ukraine, and with it less attention to current events. One of the consequences, (stubbornly) higher inflation, is being fought by central banks through interest rate increases. As a result, producers face higher costs that cannot be (fully) passed on to consumers. On the other hand, consumers have become more cautious in these uncertain times and are keeping a tight hand on their purses. Market participants are afraid that this could push economies into recession. Now that the first signs of this are becoming visible, we see long-term interest rates declining slightly, anticipating less aggressive interest rate hikes by central banks (as central banks are reluctant to raise interest rates during a recession). Equity markets took advantage of this and posted solid gains in the month of July .
Shares
July saw a marked recovery in equity markets. The MSCI All Countries World Index gained 9.7%. Europe (+7.6%) lagged relatively a bit behind North America (+11.8%) and Japan (+8.4%). In contrast to last month, emerging markets (+2.3%) did relatively somewhat less well. Here a clear difference could be seen by regions: EMEA -6.1%, Asia +1.2% and Latin America +6.9%. The fall in long-term interest rates has increased investors’ risk appetite somewhat. Thus, we saw growth stocks (+12.9%) outperform value stocks (+6.6%) last month. And defensive sectors such as health care (+5.8%) performed somewhat less than IT (+15%) or consumer luxury goods (+14.7).
Bonds
For ages we saw falling interest rates in the bond markets. Over various maturities (10/20/30-year bonds) we saw a decline of around half a percent. German 10-year rates fell 0.52% to 0.82%. In the US, 10-year rates dipped firmly below 3% again (2.65%); down 0.37%. The risk premium for less risky and more risky corporate bonds also fell: 1.84% (-0.28%) and 5.59% (+0.89%) respectively, resulting in positive yields for the month of July.