Momentum slows in global equities

Global equities are up, but momentum slows

Global equities are up around 20% over the past year to Friday's close. Momentum has, however, slowed. Global equities were up only 8% over the past six months, 4.5% over the past three months, and around 0.1% over the past month. Japan has been a standout performer, outperforming global and US equities over one, three, six and 12 months. The TOPIX has returned over 30% in US dollars over the past year. Europe has also regularly outperformed the US over the past year.

Fixed income returns have been weak (more below). Bond indices are down over one, three and six months for most of the countries we track. Fixed income has offered little protection against energy price shocks.

Gold has finally started to offer some diversification benefit and was up 1% over the past month while global equities were down. Weak global bonds and a stronger gold price suggest an inflation-driven preference for real assets.

There has been a near-parallel upward shift across the US yield curve over the past two months. The US 30-year bond yield is now well over 5%, at 5.24%.

It seems bond yields are already at a level that concerns Treasury Secretary Scott Bessent. On Friday, both Japan and the US intervened in the yen market. One reason the US may be involved is to limit the number of Treasuries the Japanese government may otherwise need to sell to buy yen.

At the time of writing, the yen was at 156.6 to the US dollar, about 4% stronger than at the open on Wednesday.

Meanwhile, volatility in South Korean markets remains high. Over the past month, the KOSPI has moved by more than 5% on 10 days, and on Friday it rose 18%. There is a three-times leveraged SK Hynix exchange-traded product in London that is down 97% from its peak.  

It appears that quite a few retail investors have been burned as a result. Margin loans have unwound, presumably due to margin calls.

There is other evidence of elevated leverage in the system. For example, last week, the hedge fund Situational Awareness, which focused on artificial intelligence (AI) plays, blew up. It's not clear how many other casualties there have been due to recent volatility, but US banks are now demanding more collateral for leveraged AI bets.

It continues to be an excellent earnings season in the US

Just over 300 S&P 500 constituents have reported for the second quarter. Of those, 85% have beaten on the bottom line.

Earnings growth in the second quarter is now expected to be 47.4% according to LSEG I/B/E/S, up from 38% last week. As with Alphabet the previous week, much of last week's increase was due to Amazon, specifically a revalued investment in Anthropic. According to FactSet, if Amazon and Alphabet were removed from the calculation, the earnings growth rate would fall to a still-impressive 29% year-on-year.

While earnings season has been exceptional in the US so far, the fact that the US market has been flat over the past month shows how much has already been priced in. Companies that have beaten on the bottom line have risen only around 0.1%, while companies that have missed have been down around 2.4%.

US corporate earnings are now 14% of US GDP, a record high. One has to question how much longer earnings growth can so meaningfully outpace the economy.

This week, just over 130 S&P 500 constituents are due to report. 

Iran update

This morning, oil was down around 4% on hopes that new talks with Iran will kick off today.

One of the key calls in energy markets is when China needs to stop eating into oil inventories. It might still be a while before this happens: stockpiles remain at 1.2 billion barrels despite recent drawdowns.

Headline US growth disappoints, but underlying domestic demand remains resilient

US second-quarter GDP growth (quarter-on-quarter, annualised) expanded by 1.5%, below the Bloomberg consensus forecast of 2%.

However, the headline result understates the strength of private domestic demand. Consumer spending was the largest positive contributor, adding approximately 1.8 percentage points to annualised GDP growth.

But there may be a potential vulnerability in the consumer market. Spending continues to outpace real disposable income.

A better measure of underlying domestic momentum, real final sales to private domestic purchasers, rose by 3.9% annualised. This excludes the volatile parts of GDP.

Inventories detracted from GDP. A low inventory-to-sales ratio may support eventual restocking, but firms will likely remain cautious while the growth and trade outlook is uncertain.

Even so, the outlook is relatively encouraging for the US, with growth expected to return to 2% or above over the coming quarters.

The consensus recovery path partly assumes that the unusually large trade and inventory distortions that have affected recent quarters will normalise.

PCE inflation falls but remains elevated

US core personal consumption expenditure (PCE) inflation eased marginally from 3.4% in May to 3.3% in June, but remained well above the Fed's target of 2%.

There is an encouraging trend nonetheless, with three-month annualised PCE inflation now at 2.9%. Underlying inflation momentum may be moving in the right direction, but progress is slow.

The six-month annualised rate of 3.1% similarly suggests that 2% inflation is some time away.

If core PCE inflation normalises towards the 20-year median monthly rate, it will be near the Fed's target by January. 

FOMC keeps rates unchanged

The Federal Open Market Committee met last week and kept US rates unchanged, as expected.

At the start of the week, markets had fully priced a 25-basis-point increase at the September meeting. Following the FOMC decision and subsequent data, that probability declined to approximately 65%. Even so, the dollar weakened post the meeting, falling around 0.8%.

High inflation and slowing growth might prove challenging for the Fed. The uncertainty around the war in Iran and the associated energy-supply risks will incrementally make it more difficult for the Fed. The import drag and the potential impact on consumers will be key.

The decision to keep rates unchanged might signal a rising credibility gap for the Fed. Inflation remains above target, and the key question is how much more inflation persistence would be required to trigger renewed tightening.

Three members dissented, preferring a quarter-percentage-point hike. This suggests a hawkish bias in the FOMC. Bloomberg Economics' natural language processing model indicates as much. 

Euro area growth surprises to the upside

The euro area economy grew 0.4% quarter-on-quarter in the second quarter (1.6% annualised, slightly above US growth), well above the consensus forecast of 0.2%.

Eurozone inflation turned higher after moderating last month, likely due to energy market dynamics. Higher oil prices represent a common global shock, but the inflation effect will differ across economies depending on energy intensity, tax structures and the speed of pass-through to consumers. 

Government revenue grows strongly in SA

South African government revenue was up 14% year-on-year in June, buoyed by mining royalties. Given revenue to date, our model forecasts a revenue overshot of near R88bn for this financial year. There is still some uncertainty around this forecast, though, and we should be able to be more precise once the December numbers are in. If it pans out that revenue exceeds the forecast by about R90bn, there should be ample scope for tax relief in February's Budget. In the interim, we can expect to see an improved revenue profile in the Medium-Term Budget Statement.

Employee tax growth is strong too, up 10% year-on-year, suggesting discretionary spending will likely be good, even if an increasing share is spent on gambling.