Markets were relatively subdued in July with the traditionally quiet holiday season taking hold. Following a 25bp rate cut at the start of the month, comments from the ECB towards month end helped push stocks into positive territory after some choppy intra-month trading. |
In US equities, the S&P 500 closed 1.26% higher with the Dow Jones Industrial Average rising just under 1% and the Nasdaq composite up 1.02%. Growth and mid-cap stocks were generally lower as evidenced by the Russell 2000 Index which came to an end in the month down 1.45%. In Europe there were stronger gains later in the month across most markets due to comments by Mario Draghi that the ECB would do ‘all that it takes’ to stabilise the ongoing European debt crisis. The EuroStoxx 50 index was 2.69% higher and the Dax and CAC gained 5.55% and 2.97%, respectively. Volatility as measured by the VIX index was slightly higher at month end at 18.93 vs 17.08 last month but credit spreads were tighter with the iTraxx Crossover Series 16 closing at 601, 36 lower than the prior month and investment grade indices also tightened.
In US treasury markets, bond yields were lower across the curve as there was increasing speculation of further intervention from the Federal Reserve. At the long end of the curve, 30 year and 10 year yields fell by 20bps and 17bps respectively, the 30 year yield closing the month at 2.55% and the 10 year at 1.47%. Two and five year yields were also lower, with the two year yield falling from 0.30% to 0.21% and the five year, dropping 14bps to 0.58%.
In European government bond markets there continued to be a divergence between the spreads on central European bonds and those of the peripheral southern European markets. German 10 year yields hit historical lows of 1.16% in the first few weeks of July, closing the month at 1.29%, down from 1.48% the prior month. Meanwhile yields on 10 year Spanish government debt were increasingly volatile, rising from a low of 6.24% to 7.62%, above the 7% level at which funding costs for countries are generally deemed to be unsustainable.
The comments from the ECB helped to stabilise prices towards month end with the yield closing the month at 6.75%. The immediacy of Spain’s funding problems was also apparent in shorter term yields with two year bonds trading from 4% up to 6.64% before closing the month at around 5%. Although less volatile, Italian sovereign yields also rose during the month with the 10 year yield closing above 6%, up from 5.8% the prior month. In commodity markets, there was weakness in economically sensitive metal markets such as copper, while gold and silver showed modest gains (1.06% and 1.3%, respectively). Energy prices were generally higher with strong gains of 3.65% in the price of crude oil and a 13.6% rise in the price of natural gas.
Mark Bridger is a capital investment manager who has worked with some of Europe's leading investment firms such as Eden Rock Capital Management and CVS Solutions.
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