Prudential Investment Managers

Prudential Investment Managers

August 2019

VIDEO: Market Snapshot July 2019

Article Summary

Our Market Snapshot provides an overview of key events that influenced financial markets over the course of July 2019.

Global equity markets were mixed in July, buoyed during the run up to the US Fed cutting rates by 0.25%, but subsequently muted by the Fed’s more hawkish stance regarding further reductions. Adding to this depressed sentiment late in the month was the unproductive conclusion of the much-anticipated US-China trade talks, the likelihood of a ‘hard Brexit’ under new UK PM Boris Johnson, and the widespread slowdown in global growth (particularly in China). In SA, the local equity and bond markets closed the month in the red on the back of the general “risk-off” sentiment among global investors which sent most emerging market assets and currencies weaker. Adding to this was ratings agency Fitch’s downgrade of SA’s sovereign credit rating outlook from stable to negative, while both the SARB and the IMF revised SA’s growth forecast downward for 2019 and 2020.

UNITED STATES

In the US, a divided Federal Reserve announced a 25 basis point rate cut as expected, but took a more hawkish tone on further reductions. The US Treasury yield curve flattened following the Fed’s announcement, with short-dated bonds selling off while long-dated bonds rallied. GDP for Q2 2019 surprised on the upside, having increased by 2.1% y/y versus a consensus of 1.8%. Inflation, meanwhile, remained stubbornly low, falling to 1.6% in June 2019 from 1.8% in the previous month. Trade data continued to show signs of contraction, largely due to the ongoing trade war between the US and China. In June, exports dropped 2.7% while imports slowed by 2.2%, creating a deeper-than-expected trade gap of $74.2 billion. US-China trade talks concluded with both parties at a stalemate. However, US delegates suggested that some smaller resolutions had been achieved, helping lift market sentiment at month-end.

UK AND EUROPE

In the UK, newly appointed Prime Minister Boris Johnson reaffirmed his commitment to leave the EU by the extended deadline of 31 October 2019, with or without a deal. The prospect of a ‘hard Brexit’ sent the pound tumbling to its lowest levels in two years.

In the EU, the ECB kept its key interest rates unchanged, however modified its forward guidance on interest rates to include the possibility of future reductions. In Germany, manufacturing PMI came in at 43.2, signalling the steepest decline in manufacturing since mid-2012. Meanwhile in Italy, the ruling party threatened to abandon its government coalition with the anti-establishment Five-Star Movement, sparking fears of a snap election.

CHINA AND JAPAN

In China, hopes of a trade-war truce between the US and China ended in disappointment after negotiations concluded in a deadlock. Although both parties appeared to have left the negotiations amicably, tensions arose after Chinese officials rejected claims that a deal had been struck regarding the procurement of US agricultural goods, contradicting statements made by the US. In other economic news, China's Manufacturing PMI came in at 49.7 for July, the third consecutive month in which the sector contracted. GDP increased by 6.2% y/y, its slowest in 27 years. And the IMF lowered China’s growth forecasts by 0.1%, to 6.2% for 2019 and 6.0% for 2020.

In Japan, the BOJ kept interest rates on hold, but committed to further easing if necessary to increase inflation and prevent the yen from appreciating. The BOJ’s forecast showed that the economic outlook remained steady, with the economy expected to expand moderately, while inflation is expected to increase gradually towards the target level of 2.0%. In spite of the BOJ having held off on expanding stimulus, it stated that it would do so “without hesitation” if a global slowdown jeopardised Japan’s economic recovery.

GLOBAL RETURNS

Looking at global equity market returns (all in US$), the MSCI All Country World Index returned 0.3% in July. Developed markets outperformed emerging markets, with the MSCI World Index delivering 0.5% and the MSCI Emerging Markets Index returning -1.1%. Among developed markets, the S&P 500 produced 1.4%, the Dow Jones Industrial 30 returned 1.1%, while the technology-heavy Nasdaq 100 posted 2.4%. The UK’s FTSE 100 returned -1.6% and Japan’s Nikkei 225 delivered 0.4%. Among the larger emerging markets, the MSCI India returned -5.2%, MSCI China -0.5% and MSCI Russia 0.7% (all in US$). The Bloomberg Barclays Global Aggregate Bond Index (US$) returned -0.3%, while the EPRA/NAREIT Global Property Index (US$) produced 0.8%.

COMMODITIES

The price of Brent crude closed the month 2.1% lower, the gold price rose 1.5% and platinum closed 4.8% higher.

SOUTH AFRICA

In SA, the SARB lowered the repo rate by 0.25% to 6.5%, taking the lead from the US and some emerging economies, and in a bid to help stimulate economic growth. The SARB reduced its GDP forecast for 2019 to 0.6%, down from 1.0% in May, while the IMF downgraded its 2019 growth forecast for SA from 1.2% to 0.7%, and from 1.5% to 1.1% for 2020. Ratings agency Fitch lowered SA’s credit rating outlook from stable to negative, citing weaker growth and heightened debt as key risks facing the economy. Eskom, meanwhile, announced an expected loss of around R20.7bn for the 2019/20 financial year (up from R2.3bn for the previous financial year), stating that it would be unable to meet its obligations without government help. The government has pledged to give the power utility an extra R59bn to help improve its financial position.

South African equities moved lower in line with emerging markets, as risk aversion swept across financial markets late in the month on the back of a resurgence in US-China trade tensions and more hawkish comments from the US Fed.

The FTSE/JSE All Share Index delivered -2.4% for the month, with Resources returning -5.2%, Financials -6.4% and Property -2.6%. Industrials was the outlier, gaining 1.2%. Elsewhere, the BEASSA All Bond Index produced -0.7%, inflation-linked bonds (the Composite ILB Index) was flat at 0%, and cash as measured by the STeFI Composite Index returned 0.6%.

The rand strengthened 1.8% against the euro and 3.3% against the pound sterling, but weakened 0.5% against the US dollar.

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