Monthly market update July '20
Global equity market movements were mixed over July, aided by positive developments on the health front and significant government stimulus and offset by news of second wave virus outbreaks and an escalation in US/China tensions. Global coronavirus cases increased, with a resurgence of new cases in Australia, Japan and some regions of Europe, while markets continued to be supported by significant fiscal stimulus and intervention by central banks. US policymakers edged towards a new stimulus package over the month, and in Australia, the government announced further support measures with an extension of the JobKeeper and JobSeeker programs, albeit at reduced rates. After a strong rally from March lows, risks remain on the horizon for investors from short-term setbacks given significant uncertainties around second wave outbreaks, the economic recovery and US/China tensions.
US equity markets had another positive month, with the S&P 500 Composite gaining 5.6% (in local currency terms). As expected, the Federal Reserve left its target interest rate range at 0.00% – 0.25% in July and remained in dovish “whatever it takes” mode. Economic data continues to provide evidence of a gradual recovery from the depths of March, with the US unemployment rate dropping to 10.2% in July (down from 11.1% in June). The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) rose to 72.0 in July, from 58.0 in the previous month, beating market expectations and indicating the US housing market recovery continues to gain pace. Similarly, the Markit US Manufacturing PMI improved to 50.9 in July, from 49.8 in June (any number above 50 signals an expansion in manufacturing activity compared to the previous month).
The Chinese equity market experienced a particularly positive July, with the Shanghai Composite Index returning 10.9% (in local currency terms). The successful control of the virus coupled with policy stimulus appears to have driven the strong economic rebound, despite the ongoing US/China tensions with the US rejecting China’s claim in the South China Sea and President Trump terminating Hong Kong’s special trade status. Chinese business conditions remained solid in July, with the Caixin Manufacturing PMI increasing to 52.80 in July, from 51.20 in June, suggesting that the economic recovery is continuing. The CNY also appreciated against the USD by 1.3%, with 1 USD buying 6.97 CNY at the end of the month.
European equities, as measured by the Euro Stoxx 50 Index, returned -1.6% (in local currency terms), as emerging virus outbreaks added to existing uncertainty. The Eurozone PMI Composite Output Index increased over the month to 54.90 in July (from 48.50 in June), signalling the first-time manufacturing production rose since the start of 2020. On the other hand, the Eurozone Consumer Economic Sentiment Index decreased further to -15.0 points in July, from
-14.7 in June (-100 indicates an extreme lack of confidence, 0 neutrality and 100 extreme confidence).
Elsewhere, the Japanese and UK share markets continued their relative underperformance when compared with the US and China, with the MSCI Japan Index and FTSE All-Share Index both falling 3.6% for the month in local currency terms. In contrast, emerging markets returned 8.1% for the month in local currency terms, despite countries such as India, Mexico and Brazil struggling to contain widespread coronavirus outbreaks, with Taiwan and South Korea contributing to this, alongside the strong performance of the Chinese market.
Australian shares, as measured by the S&P/ASX 300 Accumulation Index, had a broadly flat return for the month, returning 0.6%, with a backdrop of concerns over an intensified and extended lockdown in Victoria. Some sectors gained ground over the month, with Materials (5.9%), Information Technology (4.8%) and Telecommunication Services (3.5%) being the best performers, with Energy (-6.3%), Health Care (-3.8%) and Industrials (-3.8%) being the biggest detractors. The RBA met at the beginning of July, keeping the cash rate at 0.25% as expected. The RBA reiterated its previous forward guidance on rates and has indicated that negative interest rates are extremely unlikely but not ruled out. The Manufacturing PMI (as measured by the Ai Group Australian Performance of Manufacturing Index) increased 2 points to 53.50 in July, from 51.50 in June, indicating an expansion of the manufacturing sector as overall demand improved. The Australian listed property market rose in line with the broader market index by 0.6% in July, as measured by the S&P/ASX 300 A-REIT Accumulation Index.
Major global bond yields moved marginally lower over July, with the Australian 10-year Government bond yield falling by 5bps to 0.83%, the US 10-year Government bond yield falling 12bps to 0.54%, the UK 10-year Government bond yield falling by 7bps to 0.11%, the German 10-year Government bond yield falling by 7bps to -0.53% and the Japanese 10-year bond yield falling 1bps to 0.02%. The Italian 10-year Government bond yield had a larger fall of 25bps to 1.08%.
The Australian dollar continued its recovery, increasing a further 3.5% over the month against the USD, and finishing July at 71.4 US cents. Similarly, the Trade Weighted Index closed at 61.9 for the month, up from 60.0 at the end of June, demonstrating the appreciation of the AUD against the currencies of its major trading partners.
Note: This investment commentary does not constitute advice. All investment figures quoted relate to before-tax performance of the relevant industry benchmark. © 2020 Willis Towers Watson.
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