Cat: CFM News
12 Jul

Market Commentary July 2012


After global equities drifted lower for much of the month Mario Draghi’s comment stating he will do “whatever it takes to preserve the euro” was a positive impact to markets. European bond yields fell sharply following the ECB’s decision to cut deposit rates from 0.25% to zero. China cut interest rates as well as Korea in response to slowing economic growth. Japan’s decline in equity markets was the result of internal issues along with worse-than-expected industrial production and retail sales numbers for June. On more positive terms business confidence shows recovery in Japan on the back of the BoJ Tankan survey. Brazil contributed positively within Latin American equities assisted by a rebound in commodity and energy prices.

US equities ended the month higher despite softer US economic data. Within the sectors telecoms, energy and consumer staples outperformed the equity indices while materials and consumer discretionary underperformed. The US dollar rose further against the Euro causing further headwinds to US exporters. No further quantitative easing was initiated by the Fed.

European equities ended the month higher despite a weak second quarter. Technology and healthcare outperformed the equity indices with utilities and telecoms lagging behind. The bank rate was cut to 0.75% (from 1%) in response to weaker economic conditions. Moody’s credit rating agency cut the outlook for some of the regions highest rated nations including triple rated Germany, Netherlands and Luxembourg. German retail sales declined for a third consecutive month in June which puts the three-month average annual growth rate at 0.7%. French retail sales have slipped into negative territory while Italian and Spanish retail sales fell sharply.

In the UK a raft of profit downgrades hit the press although much of equity returns were impacted by European sentiment. The FTSE All-Share index finished the month up 1.3% recovering from a mid-month dip. UK real GDP fell by an annual rate of 0.7% in the second quarter of 2012. Inflation fell more than expected with annual CPI inflation at 2.4% in June (from 2.8% in May). The MPC increased quantitative easing by £50bn to reach £375bn and discussed the possibility of a further interest rate cut although no cut was made.

Asian equity markets ended July higher as stocks picked up sentiment from positive European markets. Singapore, Australia and Indonesia showed strong gains while India lagged on growth concerns. Chinese GDP fell back to 7.6% in Q2 (from 8.1% in Q1) however retail sales increased to 13.7% in June. Chinese interest rates were cut as well as banking reserve requirements enhancing loan and mortgage rates for consumers. CPI inflation remained at 2.2% in June. Japanese equities ended the month lower largely impacted by domestic issues. Retail sales grew only 0.2% annually (from 3.6% in May).

Emerging market indices increased 1.6% in July which was encouraged by a rebound in energy and commodity prices. Turkey and Russia saw the largest returns within emerging Europe while Indonesia and Korea led gains in emerging Asia. Latin American equity markets rose higher with support from Brazil and Mexico. Economic data releases were generally more upbeat than those from developed countries. Positive sentiment was enhanced by recent PMI figures showing expanding service and manufacturing sectors. 120,000 new jobs were created in Brazil and retail sales rose to 8.2% in May.

Government and corporate bonds saw positive returns in July. Strong demand for corporate debt and limited supply lowered yields and increased prices. Ongoing concerns about debt sustainability in the Euro zone led to negative returns for peripheral government bonds. Yields fell lower across core government bond markets in the US, UK and Germany. Total returns for both Gilts and Bunds exceeded 2% which were superseded by corporate bonds. Total return for sterling investment grade was 4.2% while European investment grade returned 2.3%.