Market Commentary

Global share markets were mixed in July. The MSCI World Index – Net returned -0.85% in unhedged AUD terms. In hedged AUD terms, the index returned 0.30%. The MSCI ACWI – Net returned -1.28% unhedged; it returned -0.29% in hedged AUD terms. 

Global equities experienced a sharp sell-off during the month, led by AI-connected tech shares. Developments in the conflict in the Middle East were also market drivers; escalating tensions pushed oil prices up from US$70 per barrel to over US$100 per barrel. Oil prices retreated slightly by the end of the month, down to US$90 per barrel on positive diplomatic developments. The news also pushed shares higher. 

Sentiment shifted against tech, particularly those that are heavily investing in AI infrastructure including data centres. There is growing scepticism that AI firms will see a return on that investment that justifies the large up-front costs as well as ongoing maintenance requirements. Korean chipmakers were hit particularly hard, with SK Hynix and Samsung down 32.9% and 16.5% respectively. South Korea’s KOSPI was down more than 20% during the month.

A sharp rally at the end of the month pulled shares up as investors saw value opportunities. SK Hynix gained nearly 30% on the final trading day and the KOSPI gained nearly 18%. In the same way that the sell-off was due to profit taking, with investors locking in significant annual gains, the rebound at the end of the month was based on optimism from Microsoft’s quarterly earnings that demonstrated how some AI investments were translating into business performance, particularly in its cloud division. The news brought confidence across the entire AI supply chain.  

Valuation concerns were just one reason for the sector decline. News out of China on advancements in manufacturing raised concern about future competitive pressures on established chipmakers. Pressure was also caused by noncommittal comments on future rate rises by new US Federal Reserve (Fed) Chair Kevin Warsh.

Overall, the US S&P500 was little changed while the tech-heavy Nasdaq was down around 2.6%. Outside of the US, Emerging Markets were pulled lower by the 20% drop in Korean markets, with the MSCI Emerging Markets index off by 3.3%. Taiwan was also off by more than 6%. Elsewhere in Asia, Japan’s Nikkei fell by around 8% while China’s equity market fell around 6.4%. Hong Kong’s Hang Seng was a strong outperformer, however, ahead by better than 13% in the month on strong rallies in tech and consumer sectors, bolstered by pro-growth policies from mainland China.

Interest rates were held steady by most central banks in July as the conflict in the Middle East seesawed between peace talks and renewed tensions. The US Federal Reserve (Fed) voted to hold rates steady in the second meeting under chair Kevin Warsh. The Fed’s approach to monetary policy under Warsh has been a significant shift from previous administrations, preferring to provide very little forward guidance. In a note following the decision, Barclay’s economists indicated that markets view the lack of comments as an indication that the Fed is considering a surprise hike to reinforce its anti-inflation credibility. The European Central Bank voted to keep three key interest rates stable despite volatile energy prices. The Bank of England (BoE) held rates unchanged at its late-July meeting in a split decision, with three members of the Monetary Policy Committee calling for a hike. In comments after the meeting, the BoE noted that the risk to inflation is less imminent and has lowered its inflation outlook.

The RBA’s Monetary Policy Committee did not meet in July, however Governor Michelle Bullock raised concern about inflation and the impact of shocks with a late-month speech. Warning that the world has become more shock-prone in in recent years, including COVID lockdowns, tariff-based volatility and recent oil shocks from geopolitical conflicts, the Governor said that the RBA was “prepared to act as required” to achieve its inflation target, including by increasing the cash rate. The next meeting of the RBA’s Monetary Policy Board is set for the second week of August.

The Bank of Japan also held rates at its meeting at the end of July, but sent hawkish signals that it would push up borrowing costs as required after the government intervened to support the weak yen. The policy rate in Japan is at its highest level since September 1995 at 1.0%. In justifying the decision to keep policy unchanged with a hawkish bias, policymakers cited upside risks to inflation stemming from demand-driven price pressures linked to the conflict in the Middle East. There was one dissent in the decision, Hajime Takata, who advocated for another rate hike. 

Australian shares outperformed international equities, with the S&P/ASX 300 Accumulation Index closing the month up 2.13%. 

Energy shares were the best performer in the month, which was due to energy price volatility driven by renewed strikes in the Middle East. While global shares were weighed down by an AI-related sell-off, Australia’s lack of direct exposure to chipmakers and megacap software companies – which had caused relative underperformance over the last year – was a strong positive for domestic equities in July. Australian materials fell in July, partially due to a decline in iron ore. The sector is also viewed as a proxy for the AI sector due to a heavy demand for the materials that are used to build semiconductors and other related equipment for data centres.  

Headline inflation through June, reported at the end of July, fell to 3.8% (below the consensus estimate of 4.0% and lower than May, which was 4.0%). Trimmed mean inflation, which is the RBA’s preferred measure of tracking inflation, also came in lower than expected at 3.6% (3.7% was expected). Trimmed mean removes volatile factors from the consumer price index, including petrol. The trimmed mean figure was steady from May. Following the release of the figures, markets were showing virtually no chance of a rate rise from the RBA at its August meeting. Predictions from the London Stock Exchange Group (LSEG) show a less than 50% chance that the RBA raises rates again before it starts considering cuts.  

Australia’s unemployment rate remained reasonably low, at 4.4% through June, which is unchanged from the month before. Underemployment rose slightly, 0.2% to 6.3% and the percentage of employment to population increased, with 64% of people counted as employed, up slightly from May and unchanged year-over-year. 

Global bonds were down in July, with the Bloomberg Global Aggregate Index – $A Hedged returning -0.94%.

Bonds moved in line with developments in the conflict in the Middle East and correlated with oil price spikes. The rise in yields toward the end of the month was seen as a sign that central banks may not be raising rates quickly enough to control inflation.

The Australian bond market was lower, with the Bloomberg AusBond Composite 0+ Year Index down -0.43%.

Australian bond yields rose by 20 basis points to 4.9% in July, the biggest monthly increase since March. The yield increases reflect investor expectations of rate increases from the Reserve Bank of Australia (RBA). Bond prices rallied (yields fell) toward the second half of the month as investors reassessed near-term monetary policy following employment data and lower (though still elevated) inflation. Australian bonds, particularly government bonds, outperformed global equivalents.  

The Australian dollar held a fairly stable value against the USD in July, finishing at $0.70. The currency was weak on softer inflation data that dampened expectations of rate hikes.