Introduction

Markets rallied in July 2023 as economic data pointed toward a more resilient global economy than previously expected. Inflation cooled across multiple regions, while consumer spending and labour markets remained firm. Investor sentiment improved significantly as the narrative around a potential soft landing gained traction. Equities surged, bond markets stabilised, and risk appetite returned across asset classes, despite continued uncertainty around central bank trajectories.

United States

U.S. equities extended their year-to-date gains, with the S&P 500 climbing 3.1% and the Nasdaq Composite rising 4.0%. Optimism was fuelled by better-than-expected Q2 earnings reports, a resilient labour market, and further evidence of disinflation. The June CPI (released mid-July) showed a year-on-year rise of just 3.0% - down from 4.0% in May - marking the slowest pace of inflation since March 2021.

In response, the Federal Reserve raised rates by 25 basis points at its July meeting, bringing the federal funds target range to 5.25%–5.50%. However, Fed Chair Jerome Powell hinted that the central bank may now be close to its terminal rate, contingent on future inflation prints. Bond yields held steady, with the 10-year Treasury ending the month near 3.96%.

Europe

European markets advanced in July, led by cyclical sectors and banks. The Euro Stoxx 50 rose by 1.7%, with strong corporate earnings and a decline in energy prices boosting investor sentiment. Inflation in the eurozone eased to 5.3% in July, down from 5.5% the previous month, helping to reduce pressure on households and businesses.

The European Central Bank (ECB) raised interest rates by another 25 basis points, pushing its deposit rate to 3.75%. However, the ECB signalled a data-dependent approach going forward, as surveys indicated softening credit conditions and business activity.

Asia-Pacific

Japan continued to outperform, with the Nikkei 225 gaining 1.4% for the month. The Bank of Japan surprised markets by adjusting its yield curve control policy to allow the 10-year JGB yield to rise more freely toward 1.0%, signalling the start of a long-anticipated policy normalisation.

China's markets remained under pressure. The Hang Seng Index dropped 1.9% and the Shanghai Composite lost 2.3% as economic data remained weak and investor confidence faltered. Although Beijing signalled more support measures in late July, markets remained sceptical of the scale and effectiveness of potential stimulus. Australia's ASX 200 rose 2.9%, supported by strong financial sector earnings and optimism around the global demand outlook.

Emerging Markets

Emerging markets rebounded in July, with the MSCI Emerging Markets Index up 5.8%. Gains were broad-based, led by Latin America, India, and parts of Southeast Asia. Softening U.S. inflation, a stable dollar, and rising commodity prices contributed to improved capital flows and sentiment.

India's markets were particularly strong, with the Nifty 50 and Sensex both reaching all-time highs. Robust domestic demand, infrastructure spending, and foreign institutional inflows underpinned performance. In Brazil, easing inflation and falling interest rate expectations boosted equities and bonds alike.

Commodities

Oil prices climbed steadily throughout July. Brent crude ended the month near USD 85/barrel, supported by Saudi production cuts and declining U.S. inventories. The improved global growth outlook also contributed to stronger demand expectations.

Gold held firm around USD 1,960/oz, as falling real yields and a softer dollar supported prices. Industrial metals such as copper and aluminium rebounded, particularly in Latin American markets, where supply-related tailwinds and higher Chinese imports boosted investor interest.

Fixed Income & Currencies

Bond markets were relatively calm in July. The U.S. 10-year Treasury yield moved modestly higher, finishing the month near 3.96% as markets priced in the likelihood of one more rate hike before a potential pause. Credit spreads narrowed, particularly in high-yield and emerging market debt.

The U.S. dollar weakened against most major currencies. The euro and yen both gained, while the Singapore dollar strengthened slightly, supported by robust trade data and steady monetary policy. EM currencies were mixed, but sentiment improved on the back of declining inflation and interest rate peaking narratives.

Outlook

With inflation continuing to moderate and economic data remaining more resilient than expected, the outlook for the second half of 2023 is cautiously optimistic. Central banks are nearing the end of their tightening cycles, and markets are increasingly focused on the timing of potential rate cuts in 2024.

Brightness Capital & Asset Advisory maintains a constructive but selective approach, favouring sectors tied to long-term themes such as digitisation, clean energy, and infrastructure. We remain watchful of liquidity conditions, credit markets, and macroeconomic divergences, with a focus on quality and risk-adjusted return potential across regions.