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In the US, Q2 results have also helped market performance, with the majority of earnings released beating analysts’ expectations. July also saw the surprise downgrade of the United States’ credit rating from AAA to AA+ by Fitch. This had not happened since 2011 (the level of debt tripled since then) and the head of Fitch argued that neither Republicans nor Democrats had been capable of finding a durable solution to solve the growing budget problem. Investors did not like it and it completely overshadowed the positive job report, which confirmed the health of the job market. There are plenty of other positive macro-economic data, such as manufacturing and new home sales figures up, positive Q1 result revisions, and conclusive stress tests of big banks. Some of the less encouraging data are the quickly drying up savings of American consumers, student loans repayment resuming, and the ongoing bank credit crunch. But overall, the positive and persistent data reduces the risk of a recession, or at the very least makes a soft landing much more likely. This led to a bond selloff and steepening of the curve in July. In Europe, the ECB also raised rates by another 25bps, taking it to 4.25%. With inflation much further away from target, although also on the right path, the future interest rate policies are much harder to predict in the Eurozone. This was clearly reflected in the performance of indices between the two sides of the pond. The PMI figures also look a lot gloomier in the Eurozone with the third consecutive down month. Asian, and in particular Chinese, stocks
performed very well in July on the back of government targeted stimulus, and an
indication that the crackdown on technology is over. This is despite
unimpressive macro indicators. Our summary recommendations Not much has changed in our view over the month
of July. With the rather large cash balance held following structured products
being recalled (explained last month), we have found opportunities in the
private credit space, which has become a major alternative to traditional bank
loans in the current environment. We are alert and ready to resume the structured
product allocation but not at any level. Finally, we are vigilant on emerging markets and Eurozone as we believe Europe is more likely to suffer from a recession and prolonged inflation and high interest rates compared to the US.
Chart of the month The chart shows the evolution of the US inflation (CPI) since 2019, with the Everest shaped figure between end of Q1 2021 until end of Q2 2023. As a reminder, it was over 8% a year ago and is now down to 3%, with a healthy target of 2%. The base effect currently being at its highest, it will be interesting to see if the next few months confirm the trend towards normality or if we see figures stagnating at 3%. Source: Bloomberg
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