Monthly Market Update for July 2015

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Please find the next blog in our monthly series that provides timely market data as well as perspectives on the current state of the economy and the global financial markets.

Global Economy:

The world’s largest economy expanded at a faster pace in the second quarter, as consumer spending grew more than projected.  Gross Domestic Product (GDP) rose at a 2.3% annualized rate and the first quarter estimate was revised to positive territory at 0.6%.  Business spending remained weak, with investment excluding residential construction dropping 0.6%, the worst decline since the third quarter of 2012.

Manufacturing activity also cooled as the strength of the US dollar restrained exports to overseas markets.  The Institute for Supply Management’s (ISM) index fell to 52.7 from a June reading of 53.5.  The much larger services industry expanded at the fastest pace in a decade spurred by a pick-up in orders.  The ISM’s non-manufacturing index jumped 4.3 points to 60.3, the highest since August 2005.

Retail sales advanced 0.6% in July amid growing demand for autos.  The previously estimated decline in June was revised to a gain indicating that rising employment, increasing wealth and lower fuel prices is encouraging continued consumer spending.

Federal Reserve (Fed) policy makers kept interest rates steady during their July meeting but noted that labor markets and housing have improved.  The Fed continues to indicate that they are moving closer to ending the policy of near zero interest rates that has been in place since 2008.

United Kingdom economic growth accelerated 0.7% during the second quarter on a strong uptick in business services, marking the 10th straight quarterly expansion.  China’s economic growth met the government’s target during the second quarter spurred by central bank monetary stimulus, rising 7%, unchanged from the first quarter.

Global Markets:

US equities generally moved higher in July as Greece’s debt crisis subsided and investors turned their focus to corporate earnings that were coming in better than expected.  The S&P 500 index ended July up 2.1%, at 2,103.84, leaving the index just 1.3% shy of its May 21, 2015 closing high of 2,130.82.  Seven of the ten sectors posted gains for the month, compared with just one last month.  Utilities did the best (+6.0%), as declining interest rates raised the appeal of these high dividend payers.  Consumer staples advanced 5.3% while Energy was the worst performing group, off 7.8%.  Energy stocks were hurt as crude oil prices continued to move lower.  About 91% of S&P 500 companies have reported second quarter earnings thus far, with 78% meeting or beating estimates.  Mid cap stocks closed nearly 1.0% higher, while small cap stocks lost ground (-1.2%) reversing June’s gains.

For the month, global equity markets closed higher.  The MSCI ACWI index rose 0.9%, after June’s loss of 2.3%, leaving the index with a 3.9% (USD) year to date gain.  July marked a volatile month for European equities, whipsawed at the start amid investor concerns of a Greek default and exit from the euro zone.  But after a last minute compromise by the Greek government and an injection of emergency funds from the European Central Bank, markets refocused on the region’s improving fundamentals.  The Stoxx Europe 600 index climbed 4.0% (+2.6% USD), its sixth monthly gain in 2015.  Investors cheered improving economic conditions in the United Kingdom, sending the MSCI UK index to a 2.5% (1.9% USD) gain.  Japanese stocks climbed on positive second quarter earnings results, with the benchmark Topix index posting a 1.8% gain (+0.3% USD).

After soaring 152% over the past year to a new record on June 12, China’s benchmark Shanghai Composite Index plunged 29% from that point through the end of July as record margin financing used to lift prices was reversed.  Despite government efforts to intervene with support measures, declining margin debt pulled the index down throughout the month.  The Hang Seng China Enterprises Index of Chinese mainland shares listed in Hong Kong tumbled 14% in July, the worst loss since September 2011.  The MSCI Emerging Markets index declined 6.9%.  Commodities plunged 10.6%, led by a 21% decline in crude oil prices.

Indications the Fed was moving closer to beginning the process of normalizing near zero policy rates helped flatten the US Treasury yield curve in July.  Short term rates inched higher while longer dated maturities declined.  Two-year Treasury yields, the most sensitive to the outlook for Fed policy, climbed as high as 0.75% during the month.  These yields then declined after data showed US wage growth in the second quarter was the slowest pace on record, potentially tempering the Fed’s plan to raise rates.  Despite the volatility, ultimately, 2-year rates rose only 2 bps to close July at 0.66%.  Ten-year yields decreased to 2.18%, from 2.35% in June, while 30-year yields fell 22 bps to 2.91%.

Receding fears of a Greek departure from the euro zone, lower inflation and speculation central banks would keep borrowing costs low, combined to boost demand for higher yielding European government bonds in July.  The euro-area inflation rate rose an annual 0.2% in July; the same pace as in June.  The core measure, which excludes food and energy prices, accelerated 1.0%.  Both measures remain below the ECB’s target of just under 2.0%.  Italian bonds achieved the largest gains in two years as the yield on 10-year Italian bonds dropped 56 bps from the previous month to 1.77%, the biggest decline since April 2013.  Portuguese government 10-year yields fell below 2.50% for the first time since May, sliding 61 bps in July to 2.39%.  Similar maturity German yields fell 12 bps to 0.64%.

The People’s Bank of China continued to accelerate monetary easing.  It cut benchmark interest rates to record lows in June, the fourth since November, and relaxed the loan-to-deposit ratio for banks.  The central bank indicated it will “flexibly use various monetary policy tools” to keep liquidity appropriate.  Emerging market bonds rose slightly in July, as the JPMorgan EMBI Global bond index of USD sovereign debt gained 0.4%.

 

Disclaimers: The data contained in this report is provided from Asset Consulting Group (ACG).  This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources. HighTower/GFP shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Securities are offered through HighTower Securities, LLC, member FINRA/SIPC/MSRB. HighTower Advisors, LLC is a SEC registered investment adviser.

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