Sovereign Wealth Partners and InvestSense Pty Ltd
Throughout July, the US and Australian markets were up by 1% and 2% respectively due to their corresponding national champions (tech and iron ore). Most other markets were flat, apart from Japan and emerging markets (mainly due to Chinese technology companies which are a large part of the universe). Gold was the standout performer, up 5%.
Bond market volatility ticked up in July, but ultimately bellwether long term government bond yields ended up down around 0.2% (quite a big deal in this yield compressed market) and by even more in Australia. On the one hand, the slight moderation in the US Fed’s preferred inflation measure (the Personal Consumption Expenditures ‘Trimmed Mean’) will help the Fed credibly stay on course keeping rates so low. On the other hand, broader measures of inflation continue to surprise on the upside and Fed Chair Jerome Powell also admitted last week to being slightly perplexed at the continued slide downwards in long-term rates.
That meant that government bond funds performed well (up 2% in July) despite such low yields, but perhaps more interestingly inflation linked bonds also performed well as inflation expectations ticked back up. Usually this would be bad news for nominal (fixed interest) government bonds, lending weight to the ‘technical’ explanation of current bond yields – too many investors (especially banks) must own and buy more of them, primarily for regulatory reasons.
Still, and at the risk of adding yet more ifs and buts in this noisy economic environment, most commodities (apart from safe haven gold) were fairly soft in July. This lends weight to the argument that rates are heading downwards due to plain old economic weakness caused by resurgent COVID cases around the world, and a global economy that is already approaching the second peak of its V-shaped recovery, and potentially rolling over. Soon, we may be talking about W shaped versus square root shaped recoveries. A bit clumsy perhaps, but you heard it here first.