July
Global equities began the third quarter with a gain of 2.8%, bringing the year-to-date gain to +14.9%. July’s gains were led by energy (+5.6%), financials (+4.2%) and materials (+4.6%), with defensive sectors such as consumer staples (+1.1%), utilities (+0.9) and healthcare (+0.6%) underperforming, as the market moves into total acceptance of the economic soft-landing scenario, having gone full circle from total belief in impending recession. Indeed, just 12 months into the fastest interest-rate hiking cycle in history, neither western stock markets nor economies are thus far showing the weakness that was expected. Inflation in the US has fallen for 11 straight months and the labour market, and the economy in general, remains strong. The EU and UK haven’t been as successful in clamping down on inflation, but the signs are that it has at least peaked. Monetary policy acting with a lag is an insufficient explanation for the strength of global markets and economies. Macro prudential regulations brought in after the global financial crisis worked in providing economic stability but have made the job of central banks harder. Measures ranging from the capital standards at European banks to the loan-to-value requirements of domestic mortgages holders have resulted in less cyclical exposure to rate rises. In addition, many years of almost zero interest rates has seen the proportion of homeowners on fixed-rate mortgages increase dramatically, limiting or at least further delaying the impact of rate rises on the economy in aggregate. Furthermore, housing in the west has a significant supply / demand imbalance – traditionally the most interest rate sensitive sector, yet despite mortgage rates going from 2pc to 7pc US housing activity is actually picking up again