Global stocks rebounded from post-Brexit blues, regaining most of the losses suffered after British voters approved a referendum in June to leave the European Union. Central bank commitments to continue with easy monetary policy and economic stimulus measures helped to support stock prices. Emerging markets stocks rallied. Investment-grade bonds rose modestly. And the dollar was essentially flat against other major currencies.
Index Returns (Monthly)
U.S. stocks climbed on better-than-expected second quarter earnings, a commitment to accommodative monetary policies by global central banks and less concern over the impact of the U.K.’s vote to exit the European Union. The Standard & Poor’s 500 Composite Index advanced 4%. The Dow Jones Industrial Average rose 3% and the technology-heavy Nasdaq composite increased 7%.
Seven of 10 S&P sectors had positive returns. Information technology shares advanced 8% on strong second-quarter earnings. Microsoft gained 11% as its cloud-services sales doubled in the second quarter, helping to offset slowing operating system and mobile phone sales. Facebook shares were lifted 8% by an impressive second-quarter profit of more than $2 billion and growing optimism surrounding the company’s live video streaming service. Despite weaker second quarter revenue, Apple rose 9% after the company raised its profit expectations for the remainder of the calendar year.
Consumer discretionary stocks rallied 5% on improving economic data and positive sales developments among automotive companies. Accelerating activity in the housing market, particularly in home sales and renovations, pushed Home Depot shares 8% higher. GM advanced 11% on strong auto sales in China, where June sales rose 11% from the previous year. Shares of television and broadcast giant Comcast climbed nearly 4% following its announcement that it would add Netflix to its set-top cable box.
Better-than-anticipated second quarter earnings drove the health care and financials stocks 5% and 4% higher, respectively. Abbott Laboratories rose 15% as robust medical device and endovascular product sales helped lift the company’s second-quarter profits above market expectations. Medical therapeutic company Biogen climbed 20% amid improved earnings and the announcement of a $5 billion share repurchase plan to be implemented during the next three years. Shares of financial behemoths Bank of America and JPMorgan Chase increased 9% and 4%, respectively, after registering higher-than-expected second quarter earnings.
Crude oil futures declined 14% in July, weighing on energy stocks, which slipped 2%. Shares of oil and gas producer ExxonMobil fell 5% on worries that refining operations’ margins will shrink as fuel inventories swell. Other commodities were mixed. Gold and copper prices increased modestly, while iron ore prices rose 11%. Persistently low commodities prices helped some materials companies, which gained 5% in the month, post solid second-quarter earnings. Chemicals companies Dow and DuPont advanced 8% and 7%, respectively, as cost-cutting measures and lower input expenses propelled earnings higher ahead of their merger. Similarly, Nucor climbed 9% after cheaper raw materials and higher prices led to the steel manufacturer beating second-quarter profit expectations.
M&A activity slowed to the lowest level in more than a year. Among the largest deals during July was French food company Danone’s acquisition of U.S.-based WhiteWave Foods, which is best known for its organic food products including Silk soy milk. The $10 billion deal will accelerate Danone’s penetration into the fast-growing dairy alternatives market in the U.S. Meanwhile, Britain’s vote to leave the EU impacted one of the larger proposed deals: Anheuser-Busch InBev upped its offer to purchase SABMiller after shareholders found the previous deal less attractive due to the post-vote devaluation of the pound. The higher offer led the SABMiller board of directors to recommend that the company accept the bid to form the world’s largest brewer.
U.S. economic data was mixed. Gross domestic product growth improved in the second quarter, registering a 1.2% quarter-to-quarter annualized rate. Consumer spending activity contributed to the pickup in growth, while private investment shrank. June payroll employment registered a strong 287,000 gain and wages continued to rise. However, the unemployment rate moved up to 4.9% as labor force participation ticked higher. Retail sales, housing starts and home sales picked up momentum, but durable goods orders dropped due to weaker aircraft orders. Although the Fed chose to leave interest rates unchanged in its July meeting, the Federal Open Market Committee’s post-meeting statement noted that the near-term risks to the economic outlook had diminished. The Fed said it would continue to monitor economic conditions to determine if additional adjustments to interest rates are warranted.
In bond markets, the Barclays U.S. Aggregate Index rose 0.6%. The yield on the benchmark 10-year Treasury note fell by 3 basis points to 1.46%, a new month-end low. The yield curve flattened slightly during the month with fears of a Brexit contagion receding as investors further embraced the view that central banks are likely to keep rates lower for longer. The more subdued outlook for rates helped drive a search for yield that benefitted a number of credit sectors. Investment-grade corporate spreads to Treasuries tightened 11 basis points to 145 basis points. Corporates rose as equity markets rallied, with investment-grade and high-yield bonds gaining 1.5% and 2.7%, respectively. Treasury Inflation Protected Securities rose 0.9%; while municipal bonds were nearly flat, rising 0.1%.
Issuers continued to take advantage of low-cost financing, with another acquisition-driven deal having been one of the month’s most notable. Teva Pharmaceutical Industries sold $15 billion of bonds to help fund its purchase of Allergan’s generics business. Of the deal’s six tranches, the largest was a $3.5 billion 10-year note with a 3.15% coupon.
European stocks staged a bounce-back rally in July, recouping some of the losses suffered in June after the so-called Brexit vote. Economically sensitive sectors led markets higher, including consumer discretionary and information technology stocks. Overall, the MSCI Europe Index rose 4%, its best monthly gain since October 2015.
The Brexit vote took its biggest toll in the form of historic outflows from European equity funds. During the third week of July, investors pulled a record-high $6.2 billion out of mutual funds that invest primarily in European stocks — bringing year-to-date outflows to $76 billion. Meanwhile, euro-zone economic growth slowed to an annualized rate of 1.2% in the second quarter, a significant deceleration from 2.2% growth in the previous quarter. The unemployment rate remained steady at 10.1%.
The European Central Bank and the Bank of England both signaled that they are prepared to cut interest rates if necessary in the wake of the Brexit vote. ECB President Mario Draghi said it was too early to tell whether the U.K.’s decision would have a lasting negative impact. British stocks rose 3% in July as investors reevaluated the implications of an EU departure, which would take at least two years. British Prime Minister David Cameron resigned and was replaced by Theresa May, the first woman to hold the office since Margaret Thatcher.
Most sectors enjoyed positive returns, highlighted by a 12% gain for information technology stocks. Shares of ARM Holdings skyrocketed after Japanese telecommunications firm SoftBank offered to buy the computer-chip designer for $32 billion. ARM designs chips for various smartphones and internet-connected devices. Shares of SAP also rose sharply after the software giant reported better-than-expected quarterly profit, boosted by rising sales of software licenses and cloud-related products.
Consumer discretionary stocks advanced 8% amid a modestly brighter outlook for consumer spending, particularly on big-ticket items. Daimler shares rallied after the automaker reported an increase in quarterly profit and record-high unit sales in its Mercedes-Benz division for the first six months of the year. BMW shares enjoyed double-digit gains, as well. U.K. officials also provided a boost for the auto sector by pledging that tariff-free car sales would be a top priority as the country negotiates its departure from the EU.
Industrials and materials stocks gained 6% and 7%, respectively, as the outlook for the global economy stabilized in the weeks after the Brexit vote. Signs of economic stabilization in China also helped boost stocks in these sectors. Glencore shares advanced on rising iron ore prices and indications that the mining giant is making progress on a debt-reduction initiative. Shares of ABB rose as the Swiss industrial firm reported consensus-beating profit, bolstered by an aggressive cost-cutting program.
In fixed income markets, European government bonds generated modest gains on expectations of further easy monetary policy in the aftermath of the Brexit vote. The yield on Germany’s benchmark 10-year note remained in negative territory, ending the month at –0.12%, essentially flat compared to June 30 levels. Meanwhile, the pound sterling continued its precipitous decline, falling 1% versus the U.S. dollar. On a year-to-date basis, the pound has tumbled 10% against the dollar and 12% against the euro.
Japanese equities rose amid increased political stability and hopes of additional central bank stimulus. Although the Bank of Japan’s latest measures were more modest than expected, they held the door open for further easing at their next meeting. The MSCI Japan and MSCI Pacific indices each climbed 6%, while the Japanese yen was essentially flat against the U.S. dollar.
Prime Minister Shinzō Abe’s ruling coalition won a majority of seats in Japan’s upper-house election, creating an easier path to implement his economic reform program. After the victory, Abe announced plans for a ¥28 trillion fiscal stimulus package. The Bank of Japan followed by increasing its purchases of exchange-traded funds from an annual pace of ¥3.3 trillion to ¥6 trillion, but stopped short of more aggressive stimulus moves, including cutting rates or accelerating the pace of bond purchases. The central bank also indicated it will conduct a thorough assessment of its negative interest rate policy and asset-buying program at its next meeting in September. Earlier in the month, Japan’s government cut its growth forecast for the fiscal year ending March 2017 from 1.7% to 0.9%, and its inflation projection from 1.2% to 0.4% for the same period. The Japan CPI declined 0.5% in June, while prices excluding food and energy increased 0.5%.
Japan’s consumer discretionary sector rose 11%. Nintendo surged 47% following the release of Pokémon Go, which became the fastest selling mobile game in history. Shares had more than doubled earlier in the month before company management reported that the game would have minimal impact on earnings. Automobile manufacturers Toyota, Nissan, Honda and Fuji Heavy all increased by double digits. Shares of Fast Retailing soared 22%, aided by sharply higher e-commerce sales and overseas operating profits. The financials sector advanced 10%, supported by large banking stocks. Shares of Ono Pharmaceutical retreated 16% amid concerns that one of its drugs contributed to adverse effects in patients. Elsewhere, Softbank declined after agreeing to buy chip-designer ARM for $32 billion.
Australian equities rose 6%. Metals and mining companies Fortescue and South32 were the top returning stocks as metals prices rallied. Shares of Australian megabanks also rallied. Construction company CIMIC had the sharpest decline in the MSCI Australia Index, after reporting profits that fell far short of expectations. The country’s second-quarter inflation rose 1.5% — the slowest pace in 19 years. The MSCI Hong Kong Index climbed 7%, led by property developers and casino operators. Developer Sun Hung Kai Properties gained 22%, after the company beat its residential sales target for the first half of the year. Every company in the index finished with positive returns.
Emerging markets stocks climbed higher for the second consecutive month on expectations that the U.S. Federal Reserve would take a cautious approach to raising interest rates and central banks would provide additional stimulus. The Emerging Markets Investable Market Index rose 5%. All sectors advanced, led by materials and information technology. Most emerging markets currencies modestly appreciated against the U.S. dollar, with the South African rand posting the strongest gain. U.S. dollar–denominated bonds, as measured by the J.P. Morgan EMBI Global Index, rose 1.6%; local currency debt, as measured by the J.P. Morgan GBI-EM Global Diversified Index, gained 0.6% in dollar terms.
Stocks in Brazil continued to surge in growing anticipation that the temporary government will secure passage of much-needed economic reforms to lift the country from recession. The MSCI Brazil IMI rallied 10%, led by banks Itaú Unibanco and Banco Bradesco. State-owned oil firm Petrobras also registered strong gains. The Brazilian real eased 1% against the dollar after climbing sharply in recent months. Elsewhere in Latin America, Mexican stocks finished flat following several months of declines. Shares of cement maker Cemex regained momentum. Shares were lifted by a second-quarter profit that topped analyst expectations and an initial public offering of its Philippines unit that helped pay down debt.
Chinese stocks posted their strongest monthly gain since March, helped by signs of stabilization in China’s economy. Gross domestic product grew 6.7% during the second quarter, on par with growth in the first three months of the year and slightly above the market’s expectation. Second-quarter growth was fueled by government stimulus measures and ongoing strength in the property market. The MSCI China IMI rose 3%. Internet services firm Tencent and state-owned telecommunications giant China Mobile were among the top gainers.
Overall, Asian markets notched solid gains. Indonesian stocks continued to move higher, climbing 6%. Gains came amid the government’s plan to fund more infrastructure projects and on the heels of a recently enacted tax amnesty program designed to finance a widening budget deficit. President Joko Widodo also reshuffled his cabinet for the second time since taking office in 2014; one of his moves included appointing a well-regarded finance minister. The MSCI India IMI rose 6% as optimism grew that Prime Minister Narendra Modi’s government would finally be able to secure passage of a major bill to simplify India’s sales tax system. Elsewhere, Taiwanese stocks rose 6% on encouraging earnings reports from bellwether Taiwan Semiconductor and others. South Korean stocks advanced 6%, lifted by gains from Samsung Electronics and steelmaker Posco.
Turkish stocks tumbled amid a shocking attempt by military officials to overthrow the government. The MSCI Turkey IMI lost 5%, while the Turkish lira sank to a record low against the dollar in the aftermath of the failed coup. The lira eventually finished 4% lower for the month. President Recep Erdoğan took swift steps to shore up his power following the coup. His government declared a three-month state of emergency and detained tens of thousands of people. Given the political and economic uncertainty, S&P downgraded Turkey’s debt one notch to BB — two steps below investment grade. Meanwhile, the central bank announced emergency measures to provide banks with liquidity and lowered the overnight lending rate for the fifth time this year.
A decline in oil prices limited gains for Russian stocks. The MSCI Russia IMI edged higher by 2%. Prices for Brent Crude — a key export — slid 15%. The ruble fell 4% against the dollar, largely affected by President Vladimir Putin’s comments regarding the ruble’s strength in recent months. A strong ruble can hurt the value of a barrel of oil in local-currency terms and curb government revenue. Russian oil exports are poised for another strong year. Exports rose 4.9% to 5.55 million barrels a day for the six months ended June 30, according to government data.
South African stocks moved higher. The MSCI South Africa IMI surged 9% amid increasing prices for mineral-related commodities and a 6% gain for the rand against the dollar. Gains came despite a bleak economic outlook that threatens to affect South Africa’s credit rating. The country’s central bank forecasts zero economic growth for this year but projected 1.1% growth for 2017.
In debt markets, Latin American countries were active. Argentina sold $2.75 billion of U.S.dollar–denominated bonds in two tranches — a 12-year bond yielding 6.625% and a 20-year bond yielding 7.125%. Elsewhere, Brazil sold a $1.5 billion in dollar bonds yielding 5.875% and Uruguay sold $1.1 billion of dollar bonds.