Following a very strong second quarter, global equity markets took a pause over July as the USA-Iran peace deal unravelled mid-month and the conflict re-escalated. Oil had been trading around U$75 per barrel, but it rose to over U$100 on the renewed military attacks which meant the Straits of Hormuz were yet again effectively closed to shipping. Oil finished the month around U$90 pushing bond yields higher as the market factored in stronger inflation and increased likelihood Central Banks would respond with tighter monetary policy. Both global bonds and NZ bonds fell by -1.1% over the month.
Company earnings reports in both the US and globally were generally strong. Aggregate year-on-year earnings growth came in higher than forecast which helped offset the uncertainty from the Middle East.
The MSCI ACWI (NZD Hedged) was down slightly (-0.5%) for the month and is now up 21% on a rolling 1 year basis. The NZ dollar was stronger versus the major currencies, meaning the MSCI ACWI Index (NZD unhedged) was down -3.4% (+22.5% rolling 1-yr).
US economic data continued to suggest the economy there was performing well. US GDP rose by an annualised 1.5% in the second quarter, below the level of growth attained in recent quarters, but stronger than many other parts of the global economy. Consumer spending and business investment were two of the bright spots. The US Federal Reserve met late July and left short term rates unchanged. There were 3 dissenters from the 12-person voting panel who favoured increasing rates. New Fed Chair Walsh continued to talk tough on keeping inflation in check and suggested higher real and nominal yields were doing some of the tightening for them. The Bank of England the European Central Banks also kept short term interest rates unchanged, but both suggested higher rates may be needed if energy prices remain elevated.
Sector leadership saw a sharp reversal from recent periods with Information Technology lagging all others on the back of extreme weakness in the previously high-flying semiconductor companies and other AI-infrastructure beneficiaries. As well as stretched valuations and uncertainty on levels of future demand, news that Chinese companies are increasing their technological prowess also weighed on sentiment. Energy and Financials were the strongest sectors which meant ‘value’ stocks outperformed ‘growth’ stocks by a significant margin.