Schroders: Monthly markets review

US 

In the US, the S&P 500 index returned -1.4%. Much of the downward pressure came on the final day of the  month when the index suffered its steepest one-day fall since April. Over the month, economic data releases  continued to be largely upbeat but this served to intensify speculation that the Federal Reserve may need to  raise interest rates sooner than expected. Data showed an ongoing improvement regarding the employment  situation with the jobless rate falling to 6.1% in June. GDP showed a strong rebound for the second quarter  with an annualised growth rate of 4.0%. Consumer confidence also improved with the Conference Board’s  index rising to 90.7 in July, the highest level since October 2007. The employment cost index, which measures  the growth of employee wages and benefits, climbed 0.7% in the second quarter. However, the housing  market remained a notable weak spot. New home sales fell 8.1% in June compared to the previous month. 

Minutes from the Federal Reserve’s (Fed) latest policy-setting meeting indicated that the tapering of the  quantitative easing programme would end in October, provided the economic recovery remains on track. At the end of the month, the first sign of dissent emerged from within the Federal Open Market Committee as Charles Plosser objected to the guidance that current low rates would likely be maintained for a considerable  time after the asset purchase programme ends. He argued that the guidance does not reflect the economic  progress made so far. 

Merger & acquisition activity continued during the month, with pharmaceutical group AbbVie finally clinching a  deal to buy UK-listed Shire while Twentieth Century Fox made an offer for Time Warner. In testimony to Congress, Fed chair Janet Yellen commented that valuations of smaller companies as well as some social media and biotechnology stocks appeared stretched, prompting some mid-month volatility. 

Eurozone 

Eurozone equities delivered negative returns in July. The volatile situation in Ukraine and capital concerns  facing a Portuguese bank weighed on returns, as did worries that the region’s nascent economic recovery may  be slowing. Industrial production data from the three largest economies – Germany, France, and Italy – were disappointing. Overall, the eurozone registered a 1.1% month on month decline in industrial production in May. 

However, the flash reading of the eurozone composite purchasing managers’ index (PMI) for July was more encouraging, coming in at 54.0 compared to 52.8 in June. As expected, the European Central Bank keptinterest rates on hold following the policy moves announced at its June meeting. Inflation continued to be well below target, dipping to 0.4% in July from 0.5% in June. Outside the eurozone, Sweden’s Riksbank cut interest rates to 0.25% from 0.75% in an effort to stimulate growth. 

Concerns over the health of the region’s banks re-emerged after audit problems at Banco Espirito Santo’s parent company. The news caused a temporary spike in Portuguese government bond yields as investors feared the state may have to step in to support the bank. Ratings agency Moody’s lifted Portugal’s credit rating to Ba1, just below investment grade, arguing that Banco Espirito Santo’s difficulties were unlikely to affect government finances. There was little sign of contagion effects on other peripheral markets. Portugal’s stockmarket delivered a steep negative return for the month, underperforming other eurozone markets. At sector level, information technology was the only sector to register positive returns for the month, supported by some strong quarterly earnings reports. Energy delivered the weakest returns as softer oil prices saw the sector retrace some of the gains made earlier this year. 

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