Economic indicators showed signs of continued improvement in the U.S. After rising sharply in the second quarter, the Dollar Spot Index retreated modestly as the U.S. dollar fell against most currencies. The U.K pound and the Japanese yen were two notable exceptions.
U.S. Treasury yields continued to move higher on the back of improving economic data and increasing inflation. As anticipated, the Federal Reserve kept policy rates steady at its July meeting, but indicated that it is prepared to raise rates at the September and December meetings. The curve continued to flatten, driving the spread between the 10- and 2-year yields to 30 bps. While interest rates moved higher, credit spreads tightened. In addition to improving economic data, a decline in credit issuance during the month created a technical tailwind that supported credit markets. Tightening credit spreads served to offset the negative impact of rising rates and the Bloomberg Barclays Aggregate Index was flat for the month.
Global equity markets broadly moved higher. In a reversal from the two prior months, U.S. growth stocks lagged their value counterparts. Roughly half of the underperformance for the growth index was attributable to shares of Facebook, which declined 11.2% in July. The company missed analysts’ estimates of revenue and user growth targets and guided to a sharp increase in expenses due in part to safety/security investments. Another FAANG company, Netflix, posted a mixed earnings report and its shares sold off 13.8% in July.
Equity returns outside of the U.S. were broadly positive as well. The most notable exception was China, which saw continued weakness as the U.S./China trade conflict escalated. On July 6th, the U.S. and China imposed tit-for-tat levies on $34 billion of each other’s exports. Less than a week later, Chinese equity markets were further shaken by the Trump administration’s announcement that it would impose 10% tariffs on an additional $200 billion in Chinese goods. Trade tensions, as well as concerns over slowing growth, have prompted China to back off its efforts to control debt and instead try to boost the economy. China’s central bank lent ¥500 billion ($74 billion) to the country’s banks during the month in an effort to spur lending—the largest loan of its kind since such injections started four years ago.
Commodities finished lower for the second straight month, led by industrial metals, energy commodities, and livestock. Trade tensions also continued to be a headwind for commodity prices as fears that the U.S./China conflict could slow global growth and hamper demand for a broad range of commodities. These tensions, along with Chinese growth concerns, contributed to the decline in industrial metals as China is the largest consumer of copper, zinc, nickel, and other metals. Copper, which is viewed as a proxy for global growth, fell by more than 4.4%. Elsewhere, crude oil declined. The dip in prices came amidst increased trade tensions, growing U.S. production and indications that the U.S. administration was considering tapping the strategic petroleum reserve to help counterbalance expected declines in Iranian exports and falling Venezuelan production.
Research Report Request
To request a full copy of this or any of our research reports, please complete all fields in the form and click submit.