July global commentary: World markets record their best month since November 2020

Global markets had their best month (MSCI World +8% MoM) since November 2020 (when markets spiked on the news of successful COVID-19 vaccine trials), but such was the extent of the declines in 1H22 that world markets are still down meaningfully YTD (MSCI World -13.9%). US corporate earnings were a key catalyst for the July rally as 55% of S&P 500 companies reported 2Q22 earnings during the month, with those earnings c. 4% ahead of consensus estimates. US large-cap tech companies saw some of the biggest share price rallies as earnings announcements and forward guidance were generally not as dire as investors were expecting. Amazon (+27% MoM), Apple (+19% MoM), and Netflix (+29% MoM) were among the best-performing stocks in July. Amazon beat earnings expectations and guided for strong growth again in 3Q22, with its cloud business particularly strong. Apple delivered disappointing results in a few segments but beat overall revenue expectations on stronger-than-expected sales in its key iPhone segment. Netflix continued to lose subscribers (c. 1mn in 2Q22) but at a slower-than-expected rate. Facebook was the only one of the famed large-cap US tech grouping to record a share price fall in July (-1.3% MoM) as the company disappointed with its first-ever YoY revenue decline as it struggled with a weakening economy and increasing competition for online advertising spend.

Emerging markets (EMs) were unable to capitalise on the better investor sentiment (MSCI EM -0.2% MoM), weighed down by Chinese stocks (Hong Kong- and US-listed Chinese corporates fell 9.3% and 11% MoM, respectively). Moreover, Chinese stocks struggled as regulatory penalties for Alibaba and Tencent raised the prospect that regulatory headwinds remain. At the same time, lockdowns in Macau and reports of a new COVD-19 variant in Shanghai reminded investors of the lurking threat of more economic damage as China continues to pursue its zero-tolerance approach to COVID-19.

US headline inflation continued to climb, with the latest reading (+9.1% YoY for June) coming in higher than the previous month (8.6% YoY) and above consensus expectations (8.8% YoY) for the third consecutive month. Core US inflation (+5.9% YoY), excluding the volatile food and energy components, seems to be moderating slightly but remains uncomfortably high. The US Federal Reserve (Fed) announced a second consecutive 0.75% hike at its July meeting, in line with expectations. The Fed also confirmed that it would likely keep raising rates for the remainder of this year.

The European Central Bank (ECB) also raised rates at its July meeting as European inflation (+8.6% YoY for June) also came in slightly above expectations, surprising markets with a 0.5% hike (after guiding for a 0.25% hike at its previous meeting), and bringing the key rate to 0%, out of negative territory for the first time in 8 years. US 2Q22 GDP growth (-0.9 QoQ annualised) also disappointed relative to expectations (+0.4% QoQ annualised) as slowing goods spending and falling inventories and property investment weighed on growth.

The prospect of slower economic growth helped to moderate the price of oil, which fell for the second-consecutive month (-4.2% MoM), but the price of natural gas spiked (+52% MoM) as Europe scrambled to replace Russian gas supplies.

In addition, the possibility of slowing economic growth dragged US long-term government yields down, with US 10-year government bond yields ending the month 0.35% lower at 2.65%, below US 2-year government bond yields (2.9%), typically a sign that bond investors are positioning for a recession.

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