Market Key Points
- The Australian equity market had an exceptionally strong month rising 4.2%. All sectors with the exception of Utilities, Energy and Materials finished the month higher.
- Australian equity performance outshone global counterparts. The S&P 500 Index (USD) rose 1.2%, the FTSE Eurotop 100 Index (EUR) rose 0.5% and the CSI 300 Index (CNY) rose 0.6%.
- The Japanese and Hong Kong markets were some of the few to finish the month lower with returns of -1.2% and -1.0%.
Australian equities
The ASX 200 Accumulation Index finished July month up 4.2%, marking its strongest monthly performance this year and reaching a new all-time high in the process. Despite expectations for earnings contractions, the strong level of market sentiment and a wave of momentum pushed shares higher.
The market saw positive returns across a wide range of sectors, with eight out of eleven finishing higher. Consumer discretionary led the way with a gain of 9.1%, followed by Property (+6.6%), Financials (+6.3%), Industrials (+5.6%), and Communication Services (+5.3%). Conversely, the Utilities (-2.9%), Energy (-0.4%), and Materials (-0.1%) sectors weighed on the Index, ending the month with negative returns.
Despite June quarter inflation data remaining sticky, investors were encouraged by the slowing core inflation number. Positive data in a UBS survey on consumer spending, coupled with undemanding valuations and overall underperformance in the sector, helped drive Consumer Discretionary companies. Meanwhile, the ‘Big Four’ Banks again pushed the Financials sector up.
Weakening metals and brent crude oil prices led to Materials and Energy shares falling, which included losses of 11.9% from Fortescue (ASX: FMG), one of the largest iron ore miners in the Index.
Global Equities
Both Emerging and Developed markets continued to rally in July. Developed markets outperformed emerging markets returning 4.08% (MSCI World Ex-Australia Index (AUD)) versus a 2.58% return (MSCI Emerging Markets Index (AUD)).
Smal Cap growth came back into focus in July over optimism US Rate cuts could drive growth for smaller companies. The Russell 2000 Index gained 10.2% and the Russell MicroCap Index gained 11.9%, outperforming the S&P500 which rose 1.2% (in local currency terms). Meanwhile the Nasdaq-100 fell -1.6% (in local currency terms) with Tech and Communications sectors dragging the Index down.
Japanese markets fell in the second half of July after hitting all-time highs as speculation around the Bank of Japan’s monetary policy meeting cautioned the market and strengthened the Yen. The Nikkei 225 Index fell 1.21% in July (in local currency terms).
Chinese equities were mixed in July as continued troubles in the real-estate sector dragged the market down, while Chinese authorities have cut the reverse repo rate and benchmark loan prime rate in a bid to stimulate the economy. The Hang Seng Index fell 1.02% and CSI 300 Index gained 0.60% (in local currency terms).
Property
The S&P/ASX 200 A-REIT Accumulation index TR performed strongly in July, with the index finishing the month 6.83% higher and up 17.70% YTD. Global real estate equities continued the strong trend (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) advancing 5.54% for the month.
Australian infrastructure began to moderate during July, with the S&P/ASX Infrastructure Index TR returning 0.34% for the month and up 5.63% YTD.
July saw muted activity on the M&A front across the A-REIT sector. Region Group (RGN) has reached an agreement with GIC to establish Metro Fund 2, with RGN holding a 20% equity interest and acting as the manager of the Fund. The ACCC has raised preliminary concerns relating to Stockland’s (SGP) acquisition of 12 Lendlease residential Masterplan community projects.
The concern revolves around the competitive supply of housing lots in four regions. Centuria Capital Group (CNI) has entered into an agreement to acquire a 50% interest in a new-generation data service provider, Reset Data Ptd Ltd for $21m. Centuria Bass, the real estate finance division of Centuria Capital Group (CNI) has secured a new $150m warehouse facility, with a $100m initial senior secured commitment from UBS.
The Australian residential property market experienced an increase of +0.5% Month on Month (as represented by CoreLogic’s five capital city aggregate). Perth was the biggest riser (+2%), followed by Adelaide (+1.6%) and Brisbane (+0.9%). In contrast, Melbourne continued to experience a fall in value (-0.5%) alongside Darwin (-0.1%) while Hobart (-0.8%) was the worst performer.
Fixed Income
July markets experienced notable shifts with investors navigating a landscape of cautious optimism amid ongoing economic uncertainties.
Much awaited June 2024 quarter ABS CPI data recorded an annual inflation figure of 3.8%, resulting in expectations of a rate pause in the August RBA Board meeting. The sectors with the highest percent changes include alcohol and tobacco (6.8%), insurance and financial services (6.4%), and education (5.6%).
The Australian Bond market rallied in July with Australian 2-Year and 10-Year bond yields dropping 28 basis points and 19 basis points, respectively. The Australian bond market, as measured by the Bloomberg AusBond Composite 0+ Yr Index, returned 1.48% over the course of July.
Globally, markets saw significant gains, with the Bloomberg Barclays Global Aggregate Index (AUD) returning 5.10% over the month against the backdrop of several economic and political developments.
The Federal Reserve signalled a pause in interest rate hikes, announcing at its July Federal Open Market Committee that the target cash rate will remain unchanged at 5.25%-5.5%. A combination of a weakening US labour market and CPI figures that were weaker than expected led to increased convictions of rate cuts from the Fed in 2024 and 2025.
This boosted US Treasuries with US 2- and 10-Year bond yields dropping 50 and 37 basis points over the month.
Currencies & Commodities
The Australian dollar (AUD) depreciated in July, closing 3% lower in trade-weighted terms to 61.4, depreciating against all four referenced currencies in this update.
The AUD saw its first monthly decline against the USD since April, despite earlier gains from solid Australian economic data and USD weakness. Market sentiment worsened in late July, leading to a sell-off, particularly after Australian CPI aligned with RBA forecasts, diminishing near-term rate hike prospects.
The Japanese Yen (JPY) was the strongest in July, rebounding swiftly from its lowest level against the AUD since 1990, reached earlier in the month.
Relative to the AUD, the JPY led in August, appreciating by 8.4%. Conversely, the USD was the laggard of the month, albeit appreciating in relative terms by 2.1% against the AUD.
Year-on-year, the AUD remains behind the Pound Sterling (GBP), Euro (EUR), and USD by -2.7%, -1.1%, and -2.9%, respectively, while ahead of the JPY by 0.2%.
Economic key points
- Australian annual inflation eased to 3.8% in June, quelling expectations of the RBA raising rates again this year
- USA’s GDP growth for the Q2 was 2.8%, ahead of market expectations
Australia
The quarterly CPI inflation to June was lower than had been feared, with the RBA’s preferred trimmed mean annualised rate easing slightly to 3.9% from 4.0% back in March. This result has quelled expectations that the RBA could raise interest rates again this year. Financial markets are now pricing in a 60% chance of an RBA rate cut by December.
Retail sales rose 0.5% in June, well ahead of the 0.2% forecast. Annual retail sales were up 2.9% with increases across all categories driven by mid-year/EOFY sales.
The unemployment rate rose to 4.1% in July and above the anticipated 7%. The Westpac-Melbourne Institute Consumer Sentiment Index fell to 82.7 in July as fears of persistent inflation and higher borrowing costs have offset any tax cut boost.
Composite PMI fell to 49.9 in July, slipping below the neutral 50 as manufacturing activity contracted and services expansion slowed. The NAB business confidence index jumped to +4 in June, well above expectations as increases in sentiment were recorded in seven out of eight industries.
The trade surplus increased to $5.59 billion in July, from the revises $5.05 billion in May and well ahead of the forecast $5 billion.
US
The USA’s GDP growth for the second quarter was an annualised rate of 2.8%, a major improvement on the first quarter and slightly ahead of market expectations, but still representing a deceleration from late 2023. Inflation, based on the Federal Reserve’s preferred measure, the Core PCE price index, was 2.9% to the end of June, a slowdown from the first quarter which keeps the rate on track towards the Fed’s 2% target. Financial markets are now pricing in at least two rate cuts by year end.
July nonfarm payrolls rose 114,000, well below the 175,000 forecast and the lowest level in three months. Unemployment rate rose to 4.3% from 4.1%, as expected amid a slight rise in the participation rate.
Retail sales for the month of May were flat as expected, whereas annual retail sales grew 2.3% for the year to June, just above the expected 2.1% increase. Consumer sentiment dropped to 66.4 in July, above the anticipated 66, but the lowest in eight months.
Composite PMI dropped marginally to 54.3 in July, but still signalled strong services sector growth.
The trade deficit narrowed to US$73.1 billion in June, above forecasts of a US$72.5 billion gap.
Eurozone
The European Central Bank held its interest rates at 3.75% in its July meeting, but accompanying commentary from ECB President Christine Lagarde indicated that a move in September was wide open and repeated that it will not pre-commit to any rate path as data will guide a decision.
The inflation rate in the Euro area unexpectedly lifted to 2.6% in July and above the forecast 2.4%.
The unemployment rate rose to 6.5% in June, above the forecast 6.4%.
Retail sales fell 0.3% in June, more than the expected 0.1% decrease, while annual sales dropped 0.3%, well below the anticipated 0.2% rise. Consumer confidence rose to -13.0 in June, likely driven by the ECB’s rate cut in June and expectations for further cuts later in the year.
The Composite PMI fell to 50.2 in July as a significant contraction in manufacturing output and subdued services growth led to a loss in momentum.
UK
Annual inflation in June was steady at 2.0%, slightly above the expected 1.9% but remaining at the Bank of England target.
Consumer confidence improved to -13 in July, up from -14 in June, but missing the -12 forecast. The July figure suggests a note of caution as people wait to see exactly how the UK's new government will affect the wider economy and their personal finances.
Retail sales dropped 1.2% in June, well below the expected -0.4%, hurt by election uncertainty, poor weather, and low footfall. Annual retail sales fell 0.2%, against an anticipated 0.4% increase.
Composite PMI rose to 52.8 in July, supported by increased demand for both goods and services.
Labour was elected with a landslide majority in the General Election on July 4. Prime Minister Keir Starmer appointed Rachel Reeves as the Chancellor of the
China
The Chinese economy grew by a seasonally adjusted 0.7% in Q2, after a marginally revised 1.5% increase in Q1.
While indicating the eighth straight period of quarterly rise, the latest result was the softest since Q2 of 2023, reflecting multiple headwinds at home such as extreme weather, weak consumption, high local government debts, and ongoing property weakness. Inflation in China rose 0.5% in July, matching the annual rate which was above market expectations of 0.3%.
China’s unemployment rate was flat at 5.0% in June, matching forecasts.
Composite PMI came in at 51.2 in July with services activity rising more than expected but dragged down by a fall in factory activity for the first time since October 2023.
Annual retail sales rose 2% in June, well short of the anticipated 3.3% and below the 3.7% gain in June.
Japan
The Bank of Japan raised its cash rate from 0.10% to 0.25%, just four months after lifting it out of negative territory, and taking another step towards normalising its monetary policy.
Annual inflation held steady at 2.8% in June, in line with market forecasts, whilst core inflation rose to 2.6% in the same period. PPI increased to 2.9% in June, from 2.6% in May and meeting market estimates.
Retail sales increased 0.6% in June, above market expectations of a 0.4% increase with annual sales growing 3.7%, also exceeding forecasts.
Consumer confidence increased to 36.7 in July, beating expectations of 36.5, as sentiment improved for most components.
Composite PMI jumped to 52.5 in July largely due to the solid expansion of services activity while manufacturing activity unexpectedly fell.
This article contains information first published by Lonsec. Voted Australia’s #1 Research House for 2019.
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