Market commentary for July 2019

Global share markets higher

Global share markets made good gains in July, driven largely by expectations slowing global growth and ongoing trade disputes will force more central banks to cut interest rates.

  • In the US, the Federal Reserve (Fed) cut its benchmark rate for the first time since 2008; though investors were left disappointed by comments from chairman, Jerome Powell, who described the move as a “mid-cycle adjustment” rather than the beginning of a sustained cycle of monetary easing. The Fed’s decision had been widely anticipated and came on the heels of recent rate cuts in New Zealand and Australia.
  • Meanwhile, the European Central Bank appeared to set the stage for looser monetary policy when it next meets in September after tasking its various committees to explore extending forward guidance and quantitative easing.
  • Share markets also benefited from some encouraging US earnings results, with the likes of Goldman Sachs, Microsoft, IBM and Coca-Cola all beating analysts’ expectations.

In saying that, there were some notable misses, including Boeing and Caterpillar; both of which have been impacted by Sino-US trade frictions. Limiting the gains was further evidence global manufacturing activity is weakening, with the latest flash purchasing manager indices in the US, Europe and Japan all underwhelming. Stocks were also hampered by news China’s economy expanded at its slowest annual pace in 27 years in the second quarter and a lack of any meaningful progress in US-China trade negotiations. Share markets were further impacted by weaker commodity prices and ongoing Brexit uncertainty, with the news that Boris Johnson had replaced Theresa May as leader of the Conservative Party doing little to allay investors’ concerns.

At the country level, US stocks hit further record highs in July with the benchmark S&P 500 Index hitting the 3,000 mark for the very first time. Share markets were also stronger in the UK, Japan, China and New Zealand, but closed slightly lower in Europe.

Australian shares tracked their global counterparts higher over the period; the local market benefiting from the Reserve Bank of Australia (RBA)’s decision to cut interest rates for a second time in as many months. Stocks were also supported by some encouraging domestic economic data, including the latest employment and inflation figures, lower US interest rates and expectations of looser monetary policy in Europe. Limiting the advance were some mixed domestic earnings updates, weakness across the major miners and mixed performances from the ‘Big Four’ banks.

RBA cuts interest rates again

The RBA cut interest rates for a second straight month in July; taking the official cash rate to a new low of just 1.00%. The move was made with a view to supporting employment growth and providing greater confidence that inflation will be consistent with the Bank’s medium-term target.

In its post-meeting statement, the RBA noted that whilst employment growth remained strong, there had been little inroad into the spare capacity in the labour market recently, and that inflation pressures remained subdued across much of the economy. In concluding its July meeting, the RBA noted that a lower cash rate would help make further inroads into the spare capacity in the economy.

The move was also expected to assist with faster progress in reducing unemployment and achieve more assured progress toward the inflation target. Moving forward, the Bank said it will continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time.

At Russell Investments, we note the RBA’s readiness to adjust monetary policy if required. Our base case is that the Bank will likely keep interest rates on hold, but we can’t rule out a further rate cut later in the year if key economic data fails to show signs of improvement.

Australian dollar falls

The Australian dollar (AUD) was weaker in July, falling on the back of the RBA’s second rate cut in as many months, weaker commodity prices and a further widening in the yield differential between Australian and US government debt. The currency was further impacted by softer Chinese economic growth and ongoing geopolitical risks. Limiting the AUD’s decline was some encouraging domestic economic data and the Fed’s rate cut toward the end of the period.

The AUD fell 1.7% against the US dollar (USD) and 0.9% against the Japanese yen. It rose 2.4% against the British pound and 0.1% against the euro, while the broader Australian Trade-Weighted Index1 closed the month 1.0% lower.

Looking ahead

Global markets have rallied in 2019, supported by central banks turning dovish and Chinese authorities announcing stronger-than-expected stimulus measures. However, yield curve inversion, trade war uncertainty and weakness in global macroeconomic data are pointing to elevated late-cycle risks. Whilst there’s a case for lower US interest rates, further Chinese stimulus and a possible US-China trade deal to support another leg higher for risk assets, we remain cautious as we feel downside risks to equity markets outweigh the upside.

We have shifted to a small underweight view on global equities overall, driven by an underweight to the US where we believe valuations are expensive. In other major equity markets, we see Europe and Japan as fairly valued. Whilst emerging markets remain attractive from a value standpoint, tailwinds from Chinese stimulus and dovish global central banks have been countered by global trade uncertainty.

For fixed income assets, we expect the Fed to cut interest rates again in September due to subdued inflation and downside risks to both US and global growth. However, we view further rate cuts beyond this as too accommodative, unless of course the headwinds for the US economy intensify. Whilst we think all major bond markets are expensive, there is cycle support for bonds that’s being driven by the dovish shift by global central banks and delayed inflation pressures. In credit markets, we believe high-yield debt is still expensive; though this is typical late in the cycle when profit growth slows and concerns over defaults rise.

In terms of currencies, we maintain a preference for the Japanese yen. We believe the yen is undervalued, has attractive ‘safe haven’ properties due to its strong, negative correlations with global equity returns, and is under-owned from a market positioning standpoint. We hold a neutral view on the USD, while the AUD is likely to continue to be impacted by monetary policy, commodity price movements and geopolitical risks involving China and other emerging markets.

Although we expect late-cycle risks to rise further, we nonetheless expect the current US expansion to continue through 2019. In saying that, we see increasing risks for a US recession in late 2020 or early 2021. Overall, we expect global growth to remain modestly positive. Whilst markets have rebounded impressively so far this year, we remain alert to downside risks of further selloffs given uncertainty over US monetary policy and changes to global trade policies. Importantly, we believe this is an environment that will favour our active management approach.


1 The trade-weighted index for the AUD is an indicator of movements in the average value of the AUD against the currencies of our trading partners.