Research Insights - Market Commentary July 2022
In July markets rebounded strongly, reversing the majority of the losses that were incurred in June. Central banks globally continued to hike interest rates as they continue to grapple with rising inflation numbers. The US has entered into a technical recession with their two last quarters having negative GDP growth. However, with low unemployment, strong wage growth and households having strong balance sheets (i.e. home equity and savings) the risks of a prolonged economic downturn are relatively low.
The European Central Bank after having negative interest rates since 2014 raised rates by 0.50%, moving the cash rate to 0%. The US Federal Reserve raised cash rates by a further 0.75% in July and the US target cash rate now sits at 2.25-2.50% in an attempt to arrest inflation that rose by 9.1% in the 12 months to the end of the June. Chaiman Jerome Powell suggested in a press conference that future rate rises will be very data-dependent as the cash rate has reached a neutral level. The Reserve Bank of Australia, after raising rates by 0.50% in both June and July, followed up with a further 0.50% rate hike in August taking the cash rate to 1.85% as Australian inflation printed 6.1% in the 12 months to the end of the June quarter.
Despite further cash rate hikes occurring, longer dated bond yields fell providing defensive investors with capital appreciation. The US yield curve inverted during the month, meaning that 2-year US Government bonds offer a higher yield to investors than 10-year US Government bonds.
The fall in long-dated bond yields provided relief for all growth assets. Australian large cap equities returned 5.3% for the month with the technology, financials, healthcare and consumer discretionary sectors all up strongly. The materials sector was the only sector in the red albeit ever so slightly. Unhedged International equities moved higher in the month by 6.4% and a rising Australian dollar (up 1.0% buying US$0.6985) increased returns for currency hedged international equity investors to 8.0%; the US market was up strongly and Asia was negative for the month -impacted by Chinese equities that sold off.
The Australian 10-year government bond yield fell by 60bps to 3.06% and the 2-year government bond yield fell by 20bps to 2.43%. The US 10-year government bond yield decreased by 36 bps to close at 2.65% and the US 2-year government bond yield fell by 7bps to 2.88%.
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