Insights

Politics have dominated headlines in July 2024. On 13 July, former President Donald Trump was wounded in an attempted assassination during an election rally. [1] Shortly a week later, following a disappointing performance in a debate and repeated calls from Democratic Party leaders and donors to step down from the election race, US President Joe Biden has withdrawn his candidacy for a second term in office and endorsed Vice President Kamala Harris as the Democratic nominee. [2]

In Europe, France’s election produced a hung parliament with the left-wing Nouveau Front Populaire (NFP) surprisingly winning the most seats in the National Assembly. Final numbers show the NFP won 182 seats, well below the number needed for an absolute majority (289). [3]

The much-anticipated Consumer Price Index (CPI) release delivered more good news on the inflation front. Headline CPI fell 0.1% month-over-month, the first decline since December 2022. Meanwhile, core CPI—which excludes volatile food and energy prices—rose by a monthly 0.1% from May, the slowest pace in three years. [4] The report added to confidence that Fed easing is not far away. Traders are now 100% certain the Federal Reserve will cut interest rates by September. [5] In July’s Federal Open Market Committee (FOMC) meeting, the Fed kept rates on hold as expected. However, the Fed delivered a more dovish message as Fed Chair Jerome Powell said that “a reduction in our policy rate could be on the table as soon as the next meeting in September.” [6]

The move to ease monetary policy among central banks continues in July. The Bank of Canada (BOC) trimmed its key interest rate by 25 basis points for the second month in a row, bringing it to 4.5 per cent. [7] China surprised markets by cutting major short and long-term interest rates on Monday, its first such broad move since August last year, signalling intent to boost growth in the world’s second-largest economy just days after a Communist Party leadership meeting. [8] In contrast, Bank of Japan (BOJ) surprised the markets with a 15-bps rate hike to 0.25% and unveiled a detailed plan to slow its massive bond buying [9], highlighting its continued shift to tighten monetary policy.

Views on Equity

In July 2024, we witnessed increasing volatility within equities. In the US, both S&P 500 & NASDAQ rallied to their all-time highs before sliding amidst a tech sell-off. The sell-off began after a report from Bloomberg that the Biden administration is mulling plans to impose more sanctions on Chinese tech firms and to heighten semiconductor trade restrictions between the US and China. [10] Comments from former President Donald Trump added further pressure on the tech sector as Trump said that Taiwan “did take about 100% of our chip business.” [11] The tech-heavy NASDAQ Composite Index tumbled 2.8% following the report, logging its worst day since December 2022. The decline continued as investors caution over how swiftly leading tech companies would be able to monetise heavy investments into AI.

As second-quarter earnings season kick off in July, the focus could shift back to corporate fundamentals. By 31 July 2024, companies representing over 60% of the S&P 500 market capitalization had reported their earnings. The results were generally positive, with 60% of companies exceeding sales estimates and 75% surpassing earnings estimates, both in line with historical averages [12]. We witnessed strong earnings among US financials in July, as the largest US banks posted better-than-expected earnings driven by a revival in investment banking revenue and growth in trading business segments. However, earnings for four of ‘The Magnificent 7’ stocks—Tesla, Meta, Microsoft, and Alphabet—were mixed. Despite Microsoft and Alphabet’s narrowly topping revenue and profit expectations, the stocks trended lower following earnings release as investors zeroed in on the bigger-than-expected capital expenditure figure, which fed into creeping worries about ever-rising AI-centric capex without a timeline for when the spending will start to pay off. The market’s reaction also highlights that earning expectations for tech remain elevated and we think it will be challenging for earnings to outperform in the near term.

Despite recent volatility, we continue to see a positive backdrop for US equities amid a still-healthy growth environment, the Fed’s prospective rate cuts, and ongoing investment in artificial intelligence (AI). We view the current market pullback as an opportunity for investors to consider investing in solid, undervalued companies with a stable outlook and significant potential for free cash flow growth. We expect the market to broaden out as money rotates from tech mega-caps which have dominated stock market returns into formerly lagging sectors like healthcare and small/mid -cap equities as a rate-cutting cycle is seen as a potential boon to smaller companies suffering from elevated borrowing costs.

Views on Fixed Income

Fixed income markets have been volatile this year, with investors constantly reassessing their expectations on the Federal Reserve’s path toward rate cuts amid mixed economic data. However, the latest inflation release is consistent with a host of other indications that price pressures are moderating, growth is slowing, and the central bank will soon be ready to ease policy. The prevailing belief is that fixed income has the potential to deliver strong returns through possible capital appreciation in this easing environment. We continue to favour short-term investment-grade bonds at current yields. Sector wise, investors may consider large national banks and super regional banks, which often have healthy balance sheets and offer strong yields compared to risk-free government securities.

Views on FX

In July 2024, the Dollar Index (“DXY”), a popular measure of the Greenback’s value against a basket of 6 major currencies, slid to its weakest level since March, trading at 103.75 (17 July 2024). Steve Englander, global head of G-10 currency research and North America strategy for Standard Chartered, said the move might be driven by investors’ expectations that former President Donald Trump might try to weaken the greenback if he prevails in November’s presidential election. Trump’s running mate, J.D. Vance, has also expressed support for a weaker dollar. [13]

Moving to Asia, the yen dominated the currency markets in July. It started the month languishing at a 38-year low of 161.96 yen per dollar but surged to below 149 yen per dollar after Bank of Japan surprised the markets by hiking rates by 25 basis points. This move led traders to unwind long-held carry trades. 

Below is what we think about the currency market:

• Japanese Yen (“JPY”): We expect the recent rally of yen to continue as unwinding of carry trade gain traction especially with the FED looking to possibly cut interest rates in September
  
  
• Euro (“EUR”): Following ECB’s decision to leave rate unchanged and extreme scenarios around French political risk abating, we expect EUR to experience a modest recovery.
  
  
• Swiss Franc (“CHF”): The volatility in yen-funded carry trades has also influenced demand for the CHF, which remains a preferred funding currency. We continue to favour the CHF as a carry currency in the long term due to its easing monetary policy stance.
  
  
• British Pound (“GBP”): We anticipate the GBP to continue languish in the near term as rates cuts gather pace.

Source:

[1] July 13, 2024, coverage of the Trump assassination attempt | CNN Politics
[2] President Joe Biden drops out of 2024 presidential race (nbcnews.com)
[3] French election: Leftists win big, far right places third – DW – 07/08/2024
[4] Inflation report: US CPI shows prices fell in June for the first time since the start of the pandemic | CNN Business
[5] Traders see the odds of a Fed rate cut by September at 100% (cnbc.com)
[6] Key takeaways from the latest Fed meeting | CNN Business
[7] Bank of Canada cuts rates, sees weaker economy in 2024 (msn.com)
[8] China cuts several major interest rates to support fragile economy | Reuters
[9] Bank of Japan raises interest rates to 0.25% (ft.com)
[10] Nasdaq has worst day since 2022 as tech stocks get slammed | CNN Business
[11] Trump says Taiwan should pay US for defense — ‘They did take about 100% of our chip business’ (yahoo.com)
[12] Daily Asia 31/07/24 – UBS House View
[13] U.S. dollar slides to weakest level since March – MarketWatch