Global Asset Allocation Team Market Update – July 2023
Financial markets fluctuated at the end of the second quarter as investors contemplated the environment of resilient growth, persistent inflation, and the trajectory for monetary policy. Global equity markets extended their 2023 gains in June amid mounting speculation that central banks will relent on the fight against inflation and engineer a soft economic landing – while bond markets wavered as investors reassessed their expectations for interest rates in the back half of 2023.
Global equity markets generated positive results in June, with the MSCI All Country World rising nearly 6%. While the 2023 gains in the S&P 500 have been narrowly concentrated in mega-cap tech stocks, the rally broadened out in June, with all S&P 500 sectors ending the month in positive terrain. The S&P 500 rose 6.5% in June. The equity market rally was also widespread across other major markets. The S&P/TSX advanced 3.0%, while the MSCI EAFE gained 4.4% and the MSCI gauge of emerging market stocks rose 3.2%.
Fixed income markets wavered last month. Bond yields pushed higher following signs of economic resiliency and still-elevated inflation that prompted traders to recalibrate their expectations for interest rates. Wagers for rate cuts have fizzled away and markets are instead bracing for additional rate hikes in the back half of 2023. Yield curves bear-flattened, with the policy-sensitive short-end of the curve seeing the biggest upward move. The 2 year treasury yield rose by 49 basis points to 4.90%, while the yield on the 10 year treasury rose by 19 basis points to 3.84%. Both are at their highest levels since the banking turmoil in early March. The Barclays US Aggregate Bond Index shed 0.36%, while the FTSE Canada Bond Universe was virtually unchanged.
The US dollar retreated after some hopeful signs that inflation is subsiding, which cemented expectations that the Federal Reserve may be nearing the end of its tightening cycle. Still, while the Fed paused in June, officials have still penciled in two more rate hikes before year-end. The yen declined as a dovish Bank of Japan put its monetary policy further at odds with the Federal Reserve and saw interest rate differentials widen in response. The Canadian dollar advanced on the back of the monthly gain in crude prices, while the Bank of Canada surprised the market and raised interest rates in June. The euro strengthened after the European Central Bank forged ahead with its tightening campaign and raised rates by another quarter-point in June and set the stage for another hike in July.
Finally, oil was on track for a monthly decline as persistent concerns over the demand outlook overshadowed a generally restrained supply backdrop. However, oil rallied towards month-end following a larger-than-expected decline in US crude stockpiles that provided some optimism for a market weighed down by demand concerns – while gold declined after major central banks signaled they’d need to stay hawkish for longer in order to bring down inflation.