Market Reviews - GBP

July 2019

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Past performance is not a guide to future performance. The value of investments and income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any products that may be mentioned.

UK

The FTSE All-Share Index advanced 2.0% in sterling terms during July. Boris Johnson triumphed in the Conservative Party leadership election and took over the reins as UK prime minister. Sterling weakened against all major currencies after Johnson signalled his steadfast rejection of the EU withdrawal agreement negotiated by his predecessor, including the Irish backstop. With the EU appearing unwilling to reopen the agreement, Johnson’s administration hastened preparations for a possible no-deal Brexit on 31 October. Official data suggested the UK economy grew by 0.3% in May versus the prior month as car manufacturers raised production following the sharp decline witnessed in April. Monthly UK retail sales for June beat forecasts, growing at 1%. In terms of sectors, mobile telecommunications (15.3%) led over the month, while leisure goods (-7.1%) sharply underperformed.

Risk Disclaimer

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any products that may be mentioned.

FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Europe

The FTSE World Europe ex-UK Index gained 1.9% in sterling terms. Official data suggested the eurozone economy grew by 0.2% in the second quarter versus 0.4% in the prior quarter. Survey data on the eurozone manufacturing sector indicated activity had fallen to its lowest level in over six years in July. Germany’s Ifo Institute manufacturing business climate index also fell sharply for the month. Early estimates suggested that eurozone inflation eased to 1.1% in July versus 1.3% in June, significantly undershooting the European Central Bank’s (ECB) 2% target. Comments from ECB president Mario Draghi further raised expectations that the ECB would unveil monetary easing measures following its September policy meeting. Worries about a no-deal Brexit increased after Boris Johnson was installed as UK prime minister and the EU rejected his calls to scrap the Irish backstop.

US

The FTSE All-World North America Index advanced 5.4% in sterling terms over July, though most of this gain came from the significant fall in the pound over the month. The US economy grew by 2.1% in the second quarter, down from the 3.1% annual pace of the prior quarter. US manufacturing output growth picked up in June, while retail sales beat forecasts. The Federal Reserve (Fed) cut interest rates by 0.25% to 2.25%, though comments from chair Jay Powell suggested the Fed could take a wait-and-see approach over the coming months rather than enact a series of aggressive rate cuts. The Fed also announced it was ending its balance sheet reduction programme on 1 August, two months earlier than planned. While trade talks between the US and China restarted, expectations for an early breakthrough were muted.

Japan

The FTSE Japan Index rose 4.1% in sterling terms during July, though most of this gain came from the significant fall in the pound over the month. The Japanese government cut its domestic economic growth forecast for the current financial year to 0.9% from its earlier 1.3% estimate, with exports growth severely impacted by ongoing trade tensions and slowing global economic growth. Data showed Japanese exports fell for a seventh consecutive month in June. Along with the fallout from the US/China trade war, there were also trade tensions between Japan and South Korea. Early in the month, Japan cited national security concerns as it placed restrictions on exports of critical materials used by South Korea’s technology sector. The Tankan sentiment gauge for Japanese manufacturers hit its lowest level in around three years in July.

Emerging Markets

The FTSE All-World Emerging Index advanced 3.5% in sterling terms over July. Turkey (15.4%) was the strongest-performing emerging market over the month in sterling terms, with the lira rallying on lower domestic inflation expectations as well as hopes of looser monetary policy from global central banks. Brazil (6.7%) was also among the top-performing markets as the real was boosted by progress in the passage of the government’s pension reform bill. Greece (5.1%) was buoyed by the electoral victory of the centre-right New Democracy party over the left-wing Syriza party and the appointment of Kyriakos Mitsotakis as prime minister. India (-1.7%) underperformed as local stocks were pressured by worries over the domestic economy and continuing credit stresses among non-bank lenders. Mexico (-0.1%) was held back by domestic political uncertainty.

Asia Pacific ex Japan

The FTSE World Asia Pacific ex Japan Index gained 2.7% in sterling terms during July. Taiwan (7.4%) was among the region’s bestperforming markets as local technology stocks performed well. Australia (4.6%) was supported by looser monetary policy from the Reserve Bank of Australia, which cut interest rates by 0.25% to 1% and struck a dovish tone. Korea (-2.6%) was hit by trade tensions with Japan; the latter cited national security concerns as it placed restrictions on exports of critical materials used by South Korea’s technology sector, a move that hit the share prices of Korean semiconductor companies. Hong Kong (0.7%) was held back by worries over escalating protests, with the real estate sector especially impacted.

Government Bonds

Global government bond yields were little changed over the month. As widely anticipated, the Fed cut interest rates by 0.25% to 2.25% following its July policy meeting. However, comments from Fed chair Jay Powell served to dampen expectations for further US rate cuts over the coming months and suggested the Fed would take a cautious approach. At the same time, the Fed also announced it was ending its balance sheet reduction programme on 1 August, two months earlier than planned. Comments from ECB president Mario Draghi further raised expectations that the ECB would unveil monetary easing measures following its September policy meeting. Headline US inflation eased to 1.6% in June versus 1.8% in the prior month. Early estimates suggested eurozone inflation fell to 1.1% in July versus 1.3% in June.

Corporate Bonds

Global corporate bond yields were little changed over the month. Eurozone data pointed to weakness in manufacturing against the impact of continuing trade tensions and slowing global growth. However, monthly US economic data was largely robust, with a pick-up in US manufacturing output growth in June. As widely anticipated, the Fed cut interest rates by 0.25% to 2.25% following its July policy meeting. However, comments from Fed chair Jay Powell served to dampen expectations for further US rate cuts over the coming months and suggested the Fed would take a cautious approach. Comments from ECB president Mario Draghi further raised expectations that the ECB would unveil monetary easing measures following its September policy meeting. FedEx issued just over $2bn worth of bonds denominated in both US dollars and euros.

*Source: Lipper to 31-Jul-2019, total return. Indices rebased to zero at at 28-Jun-2019.

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