Last week saw a strong end to the month, which helped many equity indices claw back some of the first half of year (H1) losses and have their best monthly performance for some time. There was a glut of corporate earnings and some better-than-expected results from index heavyweights in the United States helped sentiment. In addition, following the Federal Reserve (Fed) meeting, we saw a scaling back in market expectations for central bank rate hike paths. On the week, the MSCI World Index traded up 3.6%, the STOXX Europe 600 Index was up 3%, the S&P 500 Index was up 4.3% and the MSCI Asia Pacific Index was up 0.4%.1
Last Wednesday’s Fed meeting was a key focus for investors given the aggressive path higher rates have followed in recent months. The Fed raised rates 75 basis points (bps) to 2.5% as expected, but Chair Jerome Powell’s commentary gave some hope that the rate hikes may not be as aggressive going forward. Notably, Powell said that future large rate hikes are possible but would be dependent on data, and that the Fed was close to the neutral rate range. He also described the 75 bps move as “unusually large” and—to be clear—did say another such hike could be warranted at the next meeting. However, the market is now pricing the year-end federal funds rate at 3.32%, vs. expectations of 3.68% earlier in July.
This change in market sentiment caused US Treasury yields to further tighten. The US 10-year bond declined 10 bps to 2.65%, down from 3.5% in June. Technology and growth stocks continued to recover ground last week amid the drop in yields.
Some question how much of a pivot this really is. Franklin Templeton Fixed Income CIO Sonal Desai was quoted in the Financial Times as saying, “Financial markets heard only what they wanted to hear and ignored the rest. I think the stage is set for a correction and more volatility ahead.”2
In addition, over the weekend, Fed Reserve Bank of Minneapolis President Neel Kashkari made some fairly hawkish comments: “We are committed to bringing inflation down and we’re going to do what we need to do… We are a long way away from achieving an economy that is back at 2% inflation, and that’s where we need to get to.”3
European gas concerns
Headlines around gas supply continued to be the focus last week for European markets, with Russia reducing Nord Stream 1 gas supply to 20% (from 40%). European gas prices increased 30% over the past five days. The European Union (EU) confirmed a plan for member states to reduce gas consumption by 15%. This is only on a voluntary basis after number of countries pushed back on the original idea, demonstrating the challenges of coordinating energy policy across the block.
Some countries have made progress diversifying away from Russian gas. Italy has reduced its demand for Russian gas from 40% to 25% in recent months as it turns to imports from North Africa.
Germany increased non-Russian liquified natural gas (LNG) imports but remains heavily exposed. Last week a number of German regions took steps to reduce consumption. Measures such as banning hot water in public buildings, closing certain swimming pools, and dimming some street lighting (amongst others) were announced. The International Monetary Fund (IMF) estimated that Germany is at risk of losing 4.8% of economic output if Russia halts gas supplies, and the Bundesbank has suggested the potential damage could total €220 billion (US $225 billion).
Given this backdrop, we have seen some economists lower their outlook for the eurozone.
The week in review
US markets saw a strong end to the month, with the S&P 500 Index up 4.3% and the Nasdaq 100 Index up 4.4%. The S&P 500 gained 9.1% in July—its best month since November 2020—and the NASDAQ 100 gained 13%, its best month Since April 2020.
Lower bond yields helped last week’s Nasdaq strength, along with reassuring earnings reports from Amazon and Apple.
Energy stocks also advanced last week on the back of positive reports from Exxon and Chevron, which posted their highest-ever profits, benefitting from higher commodity prices.
In a risk-on environment, the defencives were left behind last week, with consumer staples and health care lagging a bit, albeit still positive on the week.
Looking to macro data, US second quarter (Q2) gross domestic product (GDP) created a lot debate. The number was worse than expected, with the US economy contracting -0.9% quarter-over-quarter (Q/Q), after contracting 1.6% in the prior quarter. Two quarters of decline is a key feature of a technical recession, but there has been debate over whether the United States is actually in one given other strong fundamentals in the economy. Republicans described the data as confirmation of “Joe Biden’s recession” but the National Bureau of Economic Research has not yet confirmed a recession. US Treasury Secretary Janet Yellen said she would be amazed if this was declared a recession, as the economy isn’t seeing significant job losses.
European equities also saw strong performance last week, as the STOXX Europe 600 Index gained 3%, and was up 7.6% for the month. Italian equities led the way higher, (with the country’s benchmark index up 5.6%). Far-right leader Giorgia Meloni currently leads in the polls, and she said she would abide by EU budget rules if she were to win. The Italian 10-year bond yield is now below 3% for the first time since May.
German equities lagged as Russia cut gas supply via Nord Stream 1 back down to 20% (having restarted at 40% the prior week).
In terms of macro data, second-quarter GDP data from Europe was a little more positive than expected, helping markets rally into month-end. Eurozone growth came in at 0.7%. Spain, France and Italy all saw better-than-expected GDP data as the tourism season helped boost economic activity. European inflation was a touch higher than expected though; the eurozone Consumer Price Index (CPI) for July rose to 8.9%, vs 8.6% previously.
Worth noting, European equity outflows continued last week, making it 24 weeks of outflows.
Looking back at the month of July, markets clearly saw a strong rebound after a torrid first half. There is much debate around to what extent this move was a “pain trade” higher, as investors were positioned so bearishly at the end of the first half. Into month-end, some of the most-shorted European names got squeezed aggressively, whilst the year-to-date outperformers, such as defence, lagged. This suggests to us that there was a positioning-led squeeze into month-end.
From a European perspective, challenges remain as the European gas crisis remains front and centre going into winter. From a global perspective, the IMF last week noted risks to economic outlook remain “overwhelmingly tilted to the downside” and downgraded 2022 global GDP to 3.2% (down 0.4% from the prior forecast).
Asian equities were mixed last week, but the MSCI Asia Pacific still managed to close up 0.4% overall.
Equities in China closed down 0.5% last week, with the government reiterating its zero-COVID policy. Geopolitical tensions with Taiwan also weighed on the market. China still views Taiwan as a province of China and unification is a key goal of China’s President Xi.
The technology sector in Asia was weaker towards the end of the week following reports that Jack Ma is to cede control of Ant Group. Alibaba closed the week down 9% on the news.
The week ahead
Monday 1 August
- Eurozone manufacturing PMI; unemployment rate
- Germany retail sales
- US S&P manufacturing Purchasing Managers Index (PMI); construction spending; Institute for Supply Management (ISM) manufacturing
- South Korea CPI
Tuesday 2 August
- US JOLTS job openings
- China Caixin PMI
- Reserve Bank of Australia meeting (50 bps hike expected)
Wednesday 3 August
- Eurozone PPI; retail sales
- US mortgage applications; S&P services and composite PMI; durable goods; factory orders; ISM services
Thursday 4 August
- Bank of England Meeting (50 bps hike expected)
- Germany factory orders
- US trade balance; jobless claims
- Japan household spending
- European Central Bank economic bulletin
Friday 5 August
- Germany Industrial Production (IP)
- France IP
- Italian IP
- US July employment report
Views you can use
Are we there yet? Fed Chairman Jerome Powell hedged himself carefully at the July press conference; markets heard it as confirming expectations that we are closing in on the terminal rate and that the Fed will likely start cutting again as early as March of next year. Our Fixed Income CIO Sonal Desai is not so sure—here are her thoughts: Read more.
Investing in infrastructure: Why now?
Infrastructure has recently seen increased attention as broad equities have been weaker in 2022 due to inflation, rising interest rates, global supply chain disruptions from COVID-19 and the war in Ukraine. Shane Hurst, Portfolio Manager with ClearBridge Investments, discusses the opportunities and potential income benefits for investors in the space today. Read more.
Opportunities in UK small- and mid-cap stocks
Despite recent underperformance of small- and mid-cap UK equities, Martin Currie UK Equity Team’s Richard Bullas and Dan Green share reasons to be optimistic about the long term. They also discuss where they are finding opportunities and the qualities of companies to look for. Read more:
Where have all the 100-yen stores gone?
Templeton Global Equity Group explores the legacy of Abenomics, the emergence of inflation in Japan, and finding value opportunities there. Read more.
K2 hedge fund strategy outlook: third quarter 2022
Economic growth, earnings, supply chains and inflation are factors our K2 Advisors team is monitoring for clues as to whether central banks can achieve the elusive “soft landing.” Read more in its third quarter hedge fund strategy outlook. Read more.
Can Japan spur political and economic policy reforms in the aftermath of former Prime Minister Shinzo Abe’s tragic demise, and the subsequent electoral victory for his ruling coalition? Dina Ting, our Head of Index Portfolio Management, shares her views on market drivers. Read more.
WHAT ARE THE RISKS?
All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.
Past performance is not an indicator or guarantee of future performance. There is no assurance that any estimate, forecast or projection will be realised.
Links to External Sites
Franklin Templeton is not responsible for the content of external websites.
The inclusion of a link to an external website should not be understood to be an endorsement of that website or the site’s owners (or their products/services).
IMPORTANT LEGAL INFORMATION
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Distributors, LLC, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com – Franklin Distributors, LLC, member FINRA/SIPC, is the principal distributor of Franklin Templeton U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.
1. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
2. Source: Financial Times, “Investors clutch at reasons to hope,” 29 July 2022.
3. Source: Bloomberg, “Kashkari Says Fed Committed to Slowing Inflation to 2% Goal,” 31 July 2022.