Equity markets performed well in July. Expectations for monetary policy easing, improving newsflow surrounding the US-China trade negotiations, a better than expected start to corporate earnings season and a potentially stabilising growth outlook, summed to a supportive backdrop for risk assets.
The highly anticipated meeting between Trump and Xi at the G20 on the last day of June resulted in a trade truce that was warmly received by markets. Trade talks restarted as Trump pledged not to increase tariffs during the discussions and scaled back restrictions on Huawei and, in return, China agreed to buy more US agricultural goods. With hindsight it is unlikely anyone really expected a monumental breakthrough in negotiations (although probably not the escalation we have witnessed through early August either), however the temporary calm allowed investors to re-focus on fundamentals.
The economic growth picture, whilst by no means amazing, was showing signs of stabilisation. Economic surprise indices across regions were starting to bottom and improvements in the US housing index aided the recovering sentiment given the sector’s importance for its multiplier effects into the broader economy (ie once you buy a house you move in, furnish it, etc etc).
Supporting this picture was an expectation for more accommodating policy. The Fed delivered on this expectation at their meeting on the 30th July, with their first interest rate cut in a decade. The 0.25% cut ended up disappointing some, including President Trump, who had anticipated a larger move. The ECB, whilst not enacting a rate cut at their July meeting, heavily signalled an easier policy setting was coming. This dovish trend in central bank messaging was consistent across the globe.
Closer to home, the conservative leadership election concluded with Boris Johnson as the new prime minister. His appointment marked a shift in our Brexit negotiating style. His apparent willingness to accept a no deal outcome has seen sterling take another leg lower. It is our belief that this harder line stance is an attempt to improve the deal on the table. The EU has so far been unwilling to countenance any change to the withdrawal agreement. It still seems most likely that the UK and EU will avoid the mutual harm of a no deal outcome, but the risks to this have increased.
Past performance is not a guide to future performance.
Michael Paul, CFA
Head of Fund Research
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