Monthly market commentary July 2018

4 min read

Despite a further rise in global bond yields, continued strength in the US dollar and concerns of escalating trade tensions between the US and China, global stock markets mostly pushed higher in July.

The US markets were helped by healthy economic data and persistent strength in company earnings. The US economy racked up an annual growth rate of 4.1% in the second quarter, its strongest growth rate since 2014, while first-quarter gross domestic product (GDP) growth was revised upward, from 2% to 2.2%. Consumer spending surged to a 4% annual pace of growth in the second quarter, after a tepid 0.5% pace in the first quarter. Government spending – at both the federal and state levels, also provided impetus to growth.

Company profits also played a part in the market’s good performance for the month. About 60% of the S&P 500 companies had released their latest quarterly results by July’s end, with 82% of those companies posting better-than-expected earnings, according to Thomson Reuters I/B/E/S.

These positive influences helped to mitigate the trade-war concerns that weighed on the market during July. Earlier in the month tariffs on US$34 billion of Chinese goods took effect; China responded with tit-for-tat charges on US goods, followed by the US announcing a 10% tariff on an additional US$200 billion of Chinese imports. While markets braced for Beijing’s response, being China has vowed to retaliate with equivalent tariffs against any US action, they were equally heartened by the US and the European Union striking an agreement during the month to ease trade tensions.

In the stock markets’ view, the positives outweighed the negatives, with the broad-market S&P 500 index posting its fourth consecutive monthly gain, adding 3.6%, while the Dow Jones Industrial Average accelerated by 4.7% – its largest monthly gain since January, and the technology-heavy Nasdaq Composite Index rose by 2.2%. The Nasdaq was held back by disappointing earnings from the major technology stocks such as Facebook suffered the biggest one-day loss of market value in US history, dropping almost US$120 billion, and lost 11.2% for the month.

In Europe, the second quarter saw a 0.3% rise in Eurozone GDP, down from 0.4%, for an annual growth rate of 2.1%, down from 2.5% in the first quarter. Eurozone inflation rose to 2.1% in July from 2.0%, with the “core” rate jumping from 0.9% to 1.1%, while the currency bloc’s unemployment rate held steady at 8.3% in June. The inflation rate was higher than expected, but the economic growth figure disappointed, neither figure viewed as changing financial markets’ expectations for the Eurozone’s official interest rates, which are expected to remain on hold until early 2019.

German retail sales rose 3% year on year in June, up from a 1.2% rise in May and well ahead of the 1.5% increase expected by analysts. German unemployment was steady at 5.2%. Germany’s forward-looking composite purchasing manager’s index (PMI) – considered an indicator of the economic health of the country’s manufacturing and service sectors – hit a five-month high in July. But in France, economic growth disappointed, as for the second quarter in a row, GDP grew by just 0.2%, slumping from 2017’s average of 0.7% growth. French consumer spending, the economy’s main growth driver, contracted in the second quarter for the first time in almost two years.

For July, the pan-European benchmark Stoxx Europe 600 index ended 3.1% higher, its first monthly gain since April. Germany’s DAX index closed July up by 4.1%, its best month since April. France’s CAC 40 index ended July 3.5% higher, while the UK’s FTSE 100 index gained 1.5% for the month.

In Asia, China’s economic growth rate eased to 6.7% annualised in the second quarter, from 6.8% in the first three months of the year, while the official July manufacturing PMI fell to a five-month low of 51.2 in July, down from 51.5 in June (but still above the 50 level, which shows expansion). The official non-manufacturing PMI fell to 54.0 in July from 55.0 in June. The private Caixin China manufacturing PMI, which focuses on smaller and medium-sized companies, came in at 50.8, falling short of a forecasted 50.9, and down from June’s reading of 51.0.

Japan’s retail sales rose more than expected in June, on the back of increased spending on fuel, appliances and cosmetics, posting a 1.8% annual rise, much stronger than the 0.6% annual increases recorded in May. Retail sales have now risen for eight consecutive months, indicating that Japanese households are growing more confident in the economy. The final Markit/Nikkei survey for Japan showed the manufacturing PMI was a seasonally adjusted 52.3, down from a 53.0 reading in June. But export growth was becalmed for the second month in a row.

On the Asian stock markets, Japan’s Nikkei appreciated by 1.1%, while in China the Shanghai Composite Index gained 1% in July. In Hong Kong, the Hang Seng Index shed 1.3%, while the Hang Seng China Enterprises Index gained 1.5%. In South Korea, the KOSPI index eased 3.5%.

In Australia, the Reserve Bank of Australia (RBA) left the official cash rate unchanged at 1.5% at its July board meeting, meaning the rate has been steady since it was reduced in August 2016. The RBA stated that “the next move in the cash rate would more likely be an increase than a decrease” – although markets appear not to expect this until at least the second half of 2019. Australian consumer sentiment, as measured by the Westpac/Melbourne Institute survey, jumped in July to the highest level in more than four years, driven by growing optimism about the economy.

The confidence surge came despite the first annual drop in national property prices in six years, with the national median house price falling by 1% over the June quarter and year, according to a report by property classifieds group Domain. In other news, Australia’s unemployment rate fell to five-and-a-half-year lows of 5.37%, while headline inflation came in at 2.1% in the year to June, up from 1.9% in the March quarter.

The S&P/ASX 200 Accumulation index gained 1.4% for the month. Telecommunications (up by 7.9%) was the star performer, led by gains from TPG Telecom (up by 11.4%). Larger companies outperformed, with both the S&P/ASX 50 and S&P/ASX 100 indexes up by 1.6%: the S&P/ASX 200 Industrials index, at 1.7% total return, well and truly outpaced its resources counterpart, on 0.1%.

Gold lost 2.3% for July, while iron ore managed a 4.1% gain. That, along with a slowing in $US strength, helped the $A gain 0.3% against the greenback over July, ending at 74.24 US cents. 

Information current as at 15 August 2018. This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This article may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material.  

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