On July 31st, the BoJ raised its key short-term interest rate to around 0.25% from the prior range of 0-0.10%. This, combined with disappointing employment figures in the US, triggered a strong global market correction in the days that followed, as many investors who had entered into the so-called “JPY carry trade” (i.e. borrowing in JPY to buy assets in higher-yielding currencies such as USD) started to unwind their positions. As a result, USDJPY fell 8% in just 4 days while US and European equities lost around 10%. Although equity markets have rebounded over the past week, recouping part of the loss, they remain volatile, as witnessed by the VIX index – often referred to as the US equity market’s “fear gauge” – which doubled from its level a month ago.
In the US: The economy is expected to slow down to 2%
In July, the US economy exhibited signs of slowing, with job creation falling to 114,000, substantially below expectations and down from the previous month’s 179,000. Despite this, the US Federal Reserve kept the Fed funds rate unchanged at a 23-year peak of 5.25-5.50%. However, given the recent drop in annual inflation to 3% – the lowest since June 2023 – and a cooling labor market, policymakers may consider reducing borrowing costs in the near future.
In Europe: Slow growth at 0.6% but with positive momentum
The Eurozone economy showed a modest growth of 0.6% year-on-year, albeit surpassing expectations. With inflation anticipated to decrease to the 2% target within the next 12 months, the European Central Bank (ECB) is likely to persist with its gradual rate reduction strategy. The current ECB deposit rate stands at 3.75%.
In China: Balance of trade reaches USD 100bn/month
While Q2 GDP growth fell short of expectations at 4.7% year-over-year due to weaker consumer spending, the country’s balance of trade notably improved, reaching a milestone of USD 100bn/month in June. This growth in trade surplus is largely supported by robust demand from Asia and other emerging markets.
Equity: In July, the S&P 500 rose 1.1%, contributing to a strong 15.8% YTD gain, whereas the Nasdaq 100 dropped 1.6%, yet maintained a 15.1% YTD increase. Meanwhile, the Euro Stoxx 50 fell 0.4% MTD, and both the Nikkei 225 and HSCEI declined, with notable drops of 1.2% and 3.5% MTD, respectively.
Fixed Income: US Treasury yields fell, with the 2-year yield decreasing by 50bps and the 10-year by 23bps. German bond yields also declined, while Chinese bond yields remained relatively stable with minimal drops. Emerging Market government bonds gained 2.2% MTD in USD, but lost 1.2% in local currencies. High-Yield bonds saw gains in July, up 1.7% in USD and 1.3% in EUR, amid declining global interest rates.
Currencies: The US dollar weakened against most major currencies in July (EURUSD +1.0%, GBPUSD +1.5%, USDCHF -1.8%, USDRMB -1.0%), with USDJPY witnessing the strongest drop month to date (-5.0%).
Commodities & Crypto: Oil and copper faced MTD losses of 4.5% and 5.2% respectively, but recorded YTD gains. Gold increased 3.7% MTD, boosting its YTD rise to 17.1%. Bitcoin surged 7.5% MTD, highlighting significant growth and growing investor interest with a 57.2% YTD rise.
During this volatile July 2024, global equity markets continued their upward trajectory, buoyed by broadening sector participation beyond tech, particularly as US inflation showed signs of easing. The potential of AI as a significant contributor to equity market returns is substantial, with semiconductors, megacap tech, and Chinese internet companies poised to drive growth.
In the US: Fading growth creates uncertainty
Despite fading economic growth, the outlook remains optimistic due to broadening profit growth, disinflation, a shift by the US Fed towards rate cuts, and heightened investment in AI infrastructure. In July, these factors have driven the Nasdaq to new all-time highs. The second-quarter earnings season has started positively, particularly for mega-cap tech companies, which are expected to influence market trends significantly. The surge in demand for AI infrastructure continues to boost digital transformation equities.
In Europe: Resilient slow growth
The economic outlook is improving, with expected cuts in interest rates creating a favorable environment for Eurozone equities. These stocks benefit from a backdrop of accelerating earnings, declining inflation, an easing monetary policy, and a gradual improvement in global manufacturing activity.
In China: Long-term growth likely to stay between 4% and 5%
Sustainable long-term growth is projected to stabilize between 4% and 5%. The market is expected to outperform regional Asian peers, bolstered by inflation moving away from deflationary levels and robust export resilience. Positive performance and momentum from internet and e-commerce giants are driving upward revisions and a broader market rerating.
In July, USD weakness, exacerbated by the US’ expanding fiscal deficit and negative trade balance, triggered a rebound in most major European and Asian currencies.
EURUSD: 1.0910, has been trading within the [1.05; 1.10] range for the past 20 months
EURUSD is currently under significant pressure, down 2.3% YTD, as the ECB initiated rate cuts ahead of the US Fed. With US presidential election developments expected to dominate in the second half of 2024, increased volatility in EURUSD is anticipated. This could potentially push the EURUSD below its current support level of 1.05.
USDRMB: 7.10, collapsing from its 7.30 all-time high
The Chinese renminbi is strengthening, with the country’s balance of trade reaching a significant USD 100bn/month. USDRMB could drop below 7.00, driven by robust trade fundamentals and an anticipated US interest rate cut. Nonetheless, USDRMB would likely remain above 6.30, given Chinese officials’ reaffirmation of their commitment to currency stability during the recent politburo meeting.
USDJPY: Drop from 162 to 142 on BoJ interest rate hike
USDJPY experienced a significant sell-off from 162 to 142 following BoJ’s decision to increase interest rates from 0-0.10% to 0.25%, prompting a wave of yen short-covering. Additionally, the BoJ announced plans to halve its monthly bond purchases to JPY 3 trillion from JPY 6 trillion between January and March 2026, as part of its strategy to transition towards a more conventional monetary policy.
Opportunity to invest in medium-term bank bonds (5-10 years): Bond yields remain elevated as overall bond credit spreads (i.e. the extra yield above government yields) are wider, reflecting the political unrest and uncertainty both in the US and Europe. Central bank rate cuts have started, and robust economic growth is maintaining low default rates. This environment presents an opportune moment to increase active bond exposure.
We believe there is a window of opportunity that we have not seen in the past 20 years where it is still possible to receive substantial income from cash deposits, with duration of 3 to 6 months (5%+ in USD and ~4% in EUR). High interest rates can be locked for longer periods by investing cash in bonds from large Investment Grade banks, which can provide an income per annum of ~6% net in USD and ~4.5% net in EUR, with a duration of 5 to 10 years.
In July, nearly all commodities, with the exception of gold, experienced sell-offs due to growing concerns over a potential global economic slowdown, which cast doubt on future demand for products ranging from crude oil to metals and grains.
Gold: New record high at USD 2,500/ounce
Gold reached a new record high of USD 2,500/ounce, driven by a weak US jobs report, which intensified expectations of a decrease in interest rates. Gold remains an attractive diversifier, especially with the upcoming US presidential election. Geopolitical polarization, inflation, the US fiscal deficit, and potential rate cuts from the Fed, all support higher gold prices. Gold could rise higher in the next 12 months, driven by falling US interest rates, increased investment demand, and continued purchases by central banks, particularly in China, Turkey, and India.
Oil: Range trading around USD 85/bbl
Despite concerns over weaker global economic growth, demand for oil continues to be robust. Reduced crude exports from OPEC+ are expected to tighten the oil market, potentially driving prices up to around USD 90/bbl by year-end.
Copper: Current weakness within the secular bullish trend
Copper prices have recently fallen below USD 9,000 per metric ton, the lowest since April, amid rising inventories and disappointing manufacturing data from the US and China, thus putting downward pressure on prices. Despite weaker-than-expected demand, inventories remain historically low. The demand for copper, fueled by electric vehicle production and the energy transition race, remains intact. Consequently, copper prices may rise further towards USD 12,000/mt in 2024 and 2025.
