Markets have been steady in July with many developed economies continuing their strong start to the year. The focus this month remained on central bank decisions and economic data stemming from China’s fiscal and credit policy. We are yet to see the full effect of China’s stimulus package but we expect it to support growth not only in China but throughout the rest of Asia and Europe.
It is unclear how the UK’s new Prime Minister, Boris Johnson will affect future negotiations with the EU. The added threat of his willingness to walk away with a no-deal has shifted the value of the pound even lower against the US dollar, as markets are beginning to price a no-deal as a realistic outcome. In addition, the perceived likelihood of another general election has increased over recent months, giving yet another reason to deter global investors from UK equities. We remain cautious and we are positioning our portfolios to minimise volatility by reducing our UK equity exposure until more clarity emerges after Boris Johnson restarts conversations with the EU over the withdrawal agreement.
Despite uncertainties created by trade disruption in the US, the S&P500 and NASDAQ both reached record highs at close on 26th July, as they were boosted by the prospect of interest rate cuts. On 31st July, the Fed reduced interest rates by 0.25%. It was the first time in 11 years that the Federal Reserve has cut interest rates as they hope to squander the first signs of financial distress and bring a recovery to global markets. The Fed chair Jerome Powell suggested that the reduction in interest rates does not signal the start of a “lengthy cutting cycle” which brought some disappointment to equity investors. Unfortunately, this wasn’t enough for Mr Trump, who’s immediate comment was that Jay Powell (Fed Chairman), had “let us down” by failing to cut rates further. The next day, a new tariff threat against China was announced – 10% on all remaining Chinese import worth $300bn and all markets fell significantly. Low interest rates have supported asset price rises for the past couple of years, so it appears that the US president is trying to influence the Fed to cut the rates further by issuing new trade war threats which damage the global economic outlook. Our Fidelity US Index fund was our best performing fund in July achieving returns of 7.6%.