UK
The UK stock market retreated during most of July as a stream of data
pointed to a rapid deterioration in the economy. Surveys from the Chartered
Institute of Purchasing and Supply (CIPS) and the Office of National Statistics
(ONS) showed that both the services and manufacturing sectors suffered big
drops in activity. The ONS also revealed that Britain's budget deficit expanded
at the fastest rate since records began in 1946, as tax revenues failed to keep
up with burgeoning costs. Claims for jobless benefits rose by the most in a
month since 1992, as companies cut positions and hiring. High petrol prices
dissuaded car buyers in June, with sales falling by 6.1%. Meanwhile, housing
surveys pointed to further signs of a rapid slowdown in the housing market.
Bodies from the British Chambers of Commerce to the Bank of England (BoE)
warned of serious declines in economic activity and a rising risk of recession.
Yet inflation remained high, rising to 3.8% from June 2007. The BoE opted to
keep interest rates at 5% as it tried to steer a cautious course between the
cross currents of high inflation and falling growth. Against this background,
UK equities entered a bear market, defined as a decline of 20% over the
previous 12 months. Financials suffered amid concerns over the health of major
players such as HBOS, Barclays and Lloyds TSB. And retailers fell on signs that
consumers were firmly shutting their pocket books. Although the market rallied
mid-month, helped by a rebound in the banking sector in the US and easing fears
over inflation, the gains were insufficient to bring the market back into
positive territory.
| Index | Local | € | £ | $ |
| FTSE All-Share | -3.60% | -3.11% | -3.60% | -4.05% |
US
US equities ended July modestly lower, which disguised a very volatile month
of trading. The majority of the economic data pointed to a further
deterioration in the economy, with net job losses totalling 62,000 in June -
the same decline as in May - and the sixth straight monthly dip. Much of the
housing data remained grim as well. Pending home resales fell more than
expected, while housing starts on single family dwellings fell to the lowest
level in 17 years. Most of the market setbacks were sparked by renewed fears
over whether the mortgage-centred credit crisis was once more getting out of
control, as questions grew about the viability of the two main
quasi-governmental mortgage finance institutions, Fannie Mae and Freddie Mac.
These worries prompted Treasury Secretary Henry Paulson to step in to reassure
the market of the government's resolve to support Freddie Mac and Fannie Mae.
But equities soon resumed their slide in the wake of the failure of a small
western regional bank, IndyMac Bancorp. Markets were further unsettled by word
of a fourth quarterly (and larger than expected) loss by Merrill Lynch. Markets
subsequently rebounded over much of the remainder of July, with a strong
recovery in financial stocks, as investors welcomed better than expected
results from Citigroup, JP Morgan Chase and Wells Fargo Bank. Market sentiment
also greatly improved as oil prices slid to six-week lows, alleviating concerns
over inflation.
| Index | Local | € | £ | $ |
| S&P 500 | -0.84% | 0.13% | -0.38% | -0.84% |
Europe
European stocks ended lower, with equities subject to strong volatility as
markets were buffeted by signs of surging inflation and sharply slowing growth.
The evidence that the region's economy was rapidly deteriorating, even in
hitherto relatively resilient countries like Germany, led the European Central
Bank (ECB) to ease its hawkish rhetoric after the widely-expected
quarter-percentage-point interest rate rise early in the month. Yet inflation
also rose (to 4.1% annualised from 4.0% in June), tying the hands of the ECB to
ease monetary policy. Stock markets fell as consumer and business sentiment
worsened sharply. Sectors exposed to the slowdown, notably retailers and
carmakers were underperformers. Financial stocks were hit by the renewed
worries over the credit crisis emanating from the US, prompted by worries over
the viability of mortgage groups Freddie Mac and Fannie Mae. Stocks jumped in
the second half of the month, helped by relief over declining oil prices, which
helped airlines and carmakers, and a recovery in banking stocks on the back of
better than expected earnings results. But the gains were not sufficient to
fully erase earlier losses.
| Index | Local | € | £ | $ |
| FTSE Europe ex UK | -1.06% | -1.31% | -1.80% | -2.26% |
Japan
The Tokyo stock market declined over most of the month. Banking stocks
suffered setbacks early on after Lehman Brothers reduced its rating of the
Japanese banking industry. Oil exploration firms and commodities businesses
were depressed by falling prices for oil, metals and other raw materials.
Later, a fresh outbreak of fears about widening losses associated with credit
markets spawned renewed worries about whether the credit crisis was under
control. Growing fears that deteriorating economic fundamentals would hit
company earnings and profits led to further market losses. But equities spiked
sharply higher in the second half as oil prices slid to six-week lows. However,
the buoyant mood proved brief as data showed that weak conditions in the US and
Europe led to the first drop in Japanese exports in four years, as overseas
demand for cars and electronics flagged. Poor earnings results from a number of
companies, notably Sumitomo Mitsui Financial and NEC Corp, contributed to
further market falls as the month came to a close.
| Index | Local | € | £ | $ |
| Japan Topix | -1.24% | -2.20% | -2.69% | -3.14% |
Bonds
Government bonds strengthened over much of July as inflation concerns eased
amid a significant decline in oil prices, while concerns about the credit
crisis rumbled on. Government bonds, especially in Europe and Japan, also
benefited from increasing evidence of weaker growth. Government bonds did
succumb to a bout of weakness in the second part of July, as a spate of high
inflation data around the world reminded investors that, in spite of recent
declines in oil prices, inflation was far from tamed. In the US, treasuries
were further undermined by better-than-expected data on consumer sentiment and
new home sales late in the month. Corporate bond markets underperformed
government bonds as concerns about credit flared once again amid renewed fears
about the viability of major financial firms, particularly those exposed to the
mortgage market. Demand for index-linked bonds was undermined by a decline in
inflation worries.
| Index | Local | € | £ | $ |
| JP Morgan Global Government All Stocks | 1.15% | 1.09% | 0.58% | 0.11% |
Asia Pacific
Stock exchanges stumbled lower over much of the first half of July, dogged
at first by lingering concerns over high oil prices. Asian markets later
succumbed to additional declines led by banks after the news of swelling losses
at US mortgage lenders Freddie Mac and Fannie Mae sparked speculation about the
viability of these institutions. Growing fears about global growth prompted
further losses. Declines in oil and other commodity prices did cheer the
region's investors for a while in the second half of the month and equities
rallied, but the mood for much of the time was gloomy and markets finished on a
down note amid declines for resource and banking stocks, as prices for metals
and oil fell and a number of financial firms announced disappointing
results.
| Index | Local | € | £ | $ |
| MSCI Asia Pacific ex Japan | -2.45% | -1.65% | -2.15% | -2.60% |