1 August 2023 Monthly Market evie - J.P. Morgan

Monthly Market Review

Review of markets over July 2023

1 August 2023

Author

Natasha May Global Market Analyst

Market sentiment remained positive in July, buoyed by a drop in developed market inflation and resilient GDP data. This raised hopes for a soft landing and supported a broad rally across most asset classes and regions.

Global stocks performed well, with the MSCI All Country World Index up 3.7% over the month in US dollar terms. Within equities, developed markets delivered 3.4% in July, but it was the riskiest sectors and regions that were the top performers. Small cap stocks and the MSCI Emerging Markets Index added 4.9% and 6.3% respectively.

Fixed income also recorded positive returns overall, with global bonds rallying 0.7% over the month. A downside surprise to the June consumer price index (CPI) print in the UK supported Gilts, with 10-year yields down a little to 4.3%. However, US Treasuries and European government bonds lost some ground as second-quarter GDP data was relatively strong.

Commodity prices reversed some of their year-to-date losses, with the broad Bloomberg Commodity Index rising 6.3% over July. The price of oil rallied, and Russia's cancellation of the Black Sea grain export deal contributed to price rises in certain agricultural commodities. However, European natural gas prices continued to fall as storage inventories reached seasonal highs.

Exhibit 1: Asset class and style returns

2012

2013

2014

2015

2016

2017

2018

Global REITS 23.0%

Small cap 32.9%

Global REITS 22.9%

Growth 3.5%

Small cap 13.3%

MSCI EM 37.8%

Global Agg -1.2%

2019

2020

Growth Growth 34.1% 34.2%

2021

Global REITs 32.6%

2022

YTD July '23

Cmdty Growth MSCI EM 16.1% 31.0% 6.3%

MSCI EM Value 18.6% 27.5%

Growth 6.5%

Global REITS 0.6%

Value 13.2%

Growth 28.5%

Global REITS -4.9%

DM Equities 28.4%

MSCI EM 18.7%

Cmdty 27.1%

Value -5.8%

DM Equities

19.3%

Cmdty 6.3%

Small cap 18.1%

DM

DM

Equities Equities

27.4% 5.5%

Small cap 0.1%

Cmdty 11.8%

Small cap 23.2%

Growth -6.4%

Small cap 26.8%

DM Equities

16.5%

Value 22.8%

Global Agg

-16.2%

Small cap 13.3%

Small cap 4.9%

Growth Growth 16.6% 27.2%

Value 4.4%

DM Equities

-0.3%

MSCI EM 11.6%

DM Equities

23.1%

DM Equities

-8.2%

Global REITs 24.4%

Small cap 16.5%

DM Equities

22.3%

DM Equities

-17.7%

MSCI EM 11.7%

Value 3.9%

DM Equities

16.5%

Global REITS 2.3%

Small cap 2.3%

Global Agg -3.2%

DM Equities

8.2%

Value 18.0%

Value -10.1%

Value 22.7%

Global Agg 9.2%

Growth 21.4%

Small cap -18.4%

Value 8.5%

DM Equities

3.4%

Value 16.4%

MSCI EM -2.3%

Global Agg 0.6%

Value -4.1%

Global REITS 6.5%

Global REITS 8.0%

Cmdty MSCI EM Value -11.2% 18.9% -0.4%

Small cap 16.2%

MSCI EM -19.7%

Global REITs 6.1%

Global REITs 3.4%

Global Agg 4.3%

Global Agg -2.6%

MSCI EM MSCI EM Growth -1.8% -14.6% 3.2%

Global Agg 7.4%

Small cap -13.5%

Cmdty 7.7%

Cmdty -3.1%

MSCI EM -2.2%

Global REITs -23.7%

Global Agg 2.1%

Growth 2.9%

Cmdty -1.1%

Cmdty -9.5%

Cmdty -17.0%

Cmdty -24.7%

Global Agg 2.1%

Cmdty 1.7%

MSCI EM -14.2%

Global Agg 6.8%

Global REITs -10.4%

Global Agg -4.7%

Growth -29.1%

Cmdty -2.0%

Global Agg 0.7%

Source: Bloomberg Barclays, FTSE, MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. DM Equities: MSCI World; REITs: FTSE NAREIT Global Real Estate Investment Trusts; Cmdty: Bloomberg Commodity Index; Global Agg: Barclays Global Aggregate; Growth: MSCI World Growth; Value: MSCI World Value; Small cap: MSCI World Small Cap. All indices are total return in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 31 July 2023.

US

The Federal Reserve (the Fed) raised its key policy rate by 25 basis points (bps) to take the fed funds rate to 5.25%-5.50%, in line with market expectations. The Federal Open Market Committee's statement was barely changed from the previous meeting, retaining the phrase "additional policy firming may be appropriate". Fed Chair Jay Powell emphasised data dependence for September's decision, but at present markets expect this latest rise to prove the peak for the current interest rate cycle.

The June CPI print, arriving in the middle of July, was the major market mover of the month, with headline inflation falling more than expected to 3% year on year (from 4% previously). While core inflation remained stickier at 4.8% year on year, Fed Chair Powell's favourite measure ? core services excluding housing ? slowed to just below 4% year on year.

This downside surprise, plus a resilient preliminary second-quarter GDP print of 2.4% (quarter on quarter annualised), raised the market's hopes for a soft landing, supporting US equities. The S&P 500 index rose 3.2% in July, taking year to date returns to over 20%. However, buoyant activity data ? suggesting the Fed may have to hold interest rates at current levels for longer than investors were expecting ? meant the MSCI World Growth Index underperformed its value counterpart in July, rising 2.9%.

Hopes of a global soft landing helped the dollar decline. In trade-weighted terms, the greenback is now down around 3% on the year.

Exhibit 2: World stock market returns

2012

2013

2014

2015

2016

2017

2018

MSCI Asia exJapan 22.7%

Japan TOPIX 54.4%

US S&P 500 13.7%

Japan TOPIX 12.1%

UK FTSE All-Share

16.8%

MSCI Asia exJapan

42.1%

US S&P 500 -4.4%

2019

2020

2021

2022

YTD July '23

US S&P 500 31.5%

MSCI Asia exJapan 25.4%

US S&P UK FTSE 500 All-Share 28.7% 0.3%

Japan TOPIX 24.5%

MSCI EM 6.3%

Japan TOPIX 20.9%

US S&P 500 32.4%

Japan TOPIX 10.3%

MSCI Europe ex-UK

9.1%

US S&P 500 12.0%

MSCI EM 37.8%

UK FTSE All-Share

-9.5%

MSCI Europe ex-UK 27.5%

MSCI EM 18.7%

MSCI Europe ex-UK 24.4%

Japan TOPIX -2.5%

US S&P 500 20.7%

MSCI Asia exJapan

6.2%

MSCI Europe ex-UK 20.0%

MSCI Europe ex-UK 24.2%

MSCI Europe ex-UK

7.4%

US S&P 500 1.4%

MSCI EM 11.6%

Japan TOPIX 22.2%

MSCI Europe ex-UK -10.6%

UK FTSE All-Share

19.2%

US S&P 500 18.4%

UK FTSE All-Share

18.3%

MSCI Europe ex-UK -12.2%

MSCI Europe ex-UK 15.3%

US S&P 500 3.2%

MSCI EM 18.6%

UK FTSE All-Share

20.8%

MSCI Asia exJapan

5.1%

UK FTSE All-Share

1.0%

MSCI Asia exJapan

5.8%

US S&P 500 21.8%

MSCI Asia exJapan -14.1%

MSCI EM 18.9%

Japan TOPIX 7.4%

Japan TOPIX 12.7%

US S&P 500 -18.1%

MSCI EM 11.7%

UK FTSE All-Share

2.6%

US S&P 500 16.0%

MSCI Asia exJapan

3.3%

UK FTSE All-Share

1.2%

MSCI Asia exJapan

-8.9%

MSCI Europe ex-UK

3.2%

MSCI Europe ex-UK 14.5%

MSCI EM -14.2%

MSCI Asia exJapan

18.5%

MSCI Europe ex-UK

2.1%

MSCI EM -2.2%

MSCI Asia exJapan -19.4%

MSCI Asia exJapan

9.6%

Japan TOPIX 1.5%

UK FTSE All-Share

12.3%

MSCI EM -2.3%

MSCI EM -1.8%

MSCI EM -14.6%

Japan TOPIX 0.3%

UK FTSE Japan All-Share TOPIX

13.1% -16.0%

Japan TOPIX 18.1%

UK FTSE All-Share

-9.8%

MSCI Asia exJapan -4.5%

MSCI EM -19.7%

UK FTSE All-Share

5.3%

MSCI Europe ex-UK

1.3%

Source: FTSE, MSCI, Refinitiv Datastream, Standard & Poor's, TOPIX, J.P. Morgan Asset Management. All indices are total return in local currency, except for MSCI Asia ex-Japan and MSCI EM, which are in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 31 July 2023.

2

Review of markets over July 2023

Europe

The European Central Bank (ECB) also raised rates in July, increasing the deposit rate 25bps to 3.75% in line with its earlier guidance. ECB president Christine Lagarde gave a "decisive maybe" to the possibility of a pause in September, although she emphasised that holding rates flat would not necessarily mean the peak of the tightening cycle had been reached.

The ECB's dovish shift was probably due to falling eurozone inflation and weaker activity data leading up to its July meeting. The eurozone composite purchasing managers' index (PMI) fell to a preliminary 48.9 in July, suggesting modest economic contraction over the month. The manufacturing PMI dropped yet further to a post-Covid low of 42.7.

However, despite this softer growth outlook, the MSCI Europe ex UK Index gained 1.3% on the month. Hopes for an ECB pause and a positive preliminary second-quarter GDP print of 0.3% quarter on quarter ? arriving near the end of the month ? were likely factors behind the gains.

Italian debt gained 0.4% over July and continues to lead its eurozone peers year to date. However, other government bonds lost ground, with 10-year Bund yields rising to 2.5%. European credit spreads tightened, with high yield still outperforming investment grade credit over the course of 2023.

Exhibit 3: Fixed income sector returns

2015

2016

2017

2018

Euro Gov. 1.6%

US HY 17.5%

EM Debt 9.3%

Euro Gov. 1.0%

2019

EM Debt 14.4%

2020

Global IL 12.7%

2021

US HY 5.3%

2022

US HY -11.2%

YTD

US HY 6.9%

July '23

EM Debt 1.6%

EM Debt 1.2%

EM Debt 10.2%

Global IG 9.1%

US Treas. 0.9%

US HY 14.4%

Global IG 10.4%

Euro HY 3.4%

Euro HY -11.7%

EM Debt 5.5%

US HY 1.4%

US Treas. 0.8%

Euro HY 10.1%

Global IL 8.7%

US HY -2.3%

Global IG 11.5%

US Treas. 8.0%

Global IL 2.7%

US Treas. -12.5%

Euro HY 5.5%

Global IG 1.0%

Euro HY 0.5%

Global IG 4.3%

US HY 7.5%

Global IG -3.6%

Euro HY 10.7%

US HY 6.1%

EM Debt -1.5%

EM Debt -16.5%

Global IG 4.5%

Euro HY 0.9%

Global IG -3.6%

Global IL 3.9%

Euro HY 6.1%

Euro HY -3.6%

Global IL 8.0%

EM Debt 5.9%

US Treas. -2.3%

Global IG -16.7%

Global IL 3.4%

Global IL 0.7%

US HY -4.6%

Euro Gov. US Treas.

3.2%

2.3%

Global IL -4.1%

US Treas. 6.9%

Euro Gov. 5.0%

Global IG -2.9%

Euro Gov. Euro Gov. Euro Gov.

-18.5%

2.4%

-0.2%

Global IL -5.0%

US Treas. Euro Gov.

1.0%

0.2%

EM Debt -4.6%

Euro Gov. 6.8%

Euro HY 2.7%

Euro Gov. -3.5%

Global IL -22.9%

US Treas. 1.2%

US Treas. -0.4%

Source: Bloomberg Barclays, BofA/Merrill Lynch, J.P. Morgan Economic Research, Refinitiv Datastream, J.P. Morgan Asset Management. Global IL: Barclays Global Inflation-Linked; Euro Gov.: Barclays Euro Aggregate Government; US Treas: Barclays US Aggregate Government - Treasury; Global IG: Barclays Global Aggregate - Corporates; US HY: BofA/Merrill Lynch US HY Constrained; Euro HY: BofA/Merrill Lynch Euro Non-Financial HY Constrained; EM Debt: J.P. Morgan EMBIG. All indices are total return in local currency, except for EM and global indices, which are in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 31 July 2023.

In the UK, wage data remained elevated, with average earnings ex-bonuses growing 7.3% year on year in June. However, inflation softened more than expected, with June's headline CPI rising 7.9% year on year (down from 8.7% in May) ? the first positive inflation surprise in around a year. Markets are leaning towards a 25bp hike by the Bank of England (BoE) at its upcoming August meeting, with more to come. Nonetheless, the expected peak Bank Rate has fallen, from highs of above 6% to around 5.75%.

J.P. Morgan Asset Management

3

The FTSE All-Share underperformed global developed market equities in July, likely due to the weak UK growth outlook ? the UK manufacturing PMI fell to a preliminary 45.0 in July ? and prospect of further monetary tightening. However, the UK index still posted a positive return of 2.6% over the month. Sterling benefited from the additional hikes priced for the BoE versus other developed market central banks, with GBPUSD rising 1.1% in July.

Asia

Japanese equities, while still the top performing regional market year to date, also underperformed in July. The TOPIX gained 1.5%, less than other developed market peers, as the Bank of Japan (BoJ) loosened its yield curve control framework and the yen rallied. Japanese inflation remained strong, with the BoJ's preferred measure (CPI excluding fresh food and energy) rising 4.2% year on year in June. Given the strong inflation data, at its July meeting the BoJ turned its current 0.5% yield ceiling from a rigid limit into a reference point, and will now buy 10-year Japanese government bonds at up to 1%.

In China, sequential GDP growth slowed in the second quarter. Nonetheless, the MSCI China Index has now delivered positive year to date returns thanks to a rise of 9.1% in local currency over July. Some policy easing and hopes for further stimulus were behind the gains, with the strength in China's market ? plus somewhat softer rate expectations in developed markets ? helping the MSCI Asia ex Japan Index post a strong return of 6.2% on the month.

Exhibit 4: Fixed income government bond returns

2015

2016

2017

2018

2019

2020

Italy 4.8%

UK 10.7%

Global 7.5%

Spain 2.5%

Italy 10.6%

Global 9.7%

2021

Japan -0.2%

2022

Japan -5.4%

YTD

Italy 4.9%

July '23

UK 0.8%

Spain 1.7%

Spain 4.1%

US 2.3%

Germany 1.9%

Spain 8.3%

UK 8.9%

US -2.3%

US -12.5%

Spain 2.0%

Global 0.7%

Japan

Germany

UK

Japan

UK

1.2%

3.4%

2.0%

1.0%

7.1%

US 8.0%

Germany -2.9%

Global -16.8%

Germany 1.3%

Italy 0.4%

US 0.8%

Japan 3.2%

Spain 1.1%

US 0.9%

US 6.9%

Italy 7.9%

Italy -3.0%

Italy -17.2%

Global 1.3%

Spain -0.1%

UK 0.5%

Global 1.7%

Italy 0.8%

UK 0.5%

Global 5.6%

Spain 4.3%

Spain -3.0%

Germany -17.4%

US 1.2%

Germany -0.2%

Germany 0.4%

US 1.0%

Japan 0.2%

Global -0.7%

Germany 3.1%

Germany 3.0%

UK -5.3%

Spain -17.5%

Japan 1.1%

US -0.4%

Global -3.7%

Italy 0.8%

Germany -1.0%

Italy -1.3%

Japan 1.7%

Japan -0.8%

Global -5.8%

UK -25.1%

UK -3.1%

Japan -1.6%

Source: Bloomberg Barclays, Refinitiv Datatsream, J.P. Morgan Asset Management. All indices are Bloomberg Barclays benchmark government indices. All indices are total return in local currency, except for global, which is in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 31 July 2023.

4

Review of markets over July 2023

Conclusion

Broadly, markets remained buoyant in July as investors retained their optimism, building over the course of the year, that inflation can fall back to target without significant further interest rate hikes or a meaningful decline in economic activity. Whether Goldilocks is really back, or whether such a scenario is too good to be true, was the subject of our Mid-year Outlook.

Exhibit 5: Index returns for July 2023

Index Equities (MSCI) MSCI World Index MSCI USA MSCI Europe ex-UK MSCI United Kingdom MSCI Japan MSCI AC Asia ex-JP MSCI EM Latin America MSCI EM (Emerging Markets)

GBP

USD

JPY

EUR

LOC

2.2

3.4

1.6

2.3

2.9

2.2

3.4

1.7

2.4

3.4

1.8

3.0

1.2

1.9

1.3

2.2

3.4

1.7

2.4

2.2

1.8

3.0

1.3

1.9

1.3

4.9

6.2

4.4

5.1

5.4

3.9

5.2

3.4

4.1

3.7

5.0

6.3

4.5

5.2

5.4

Bonds

Bloomberg Barclays Global Aggregate

-0.5

0.7

-1.0

-0.4

Bloomberg Barclays US Aggregate

-1.3

-0.1

-1.8

-1.1

-0.1

Bloomberg Barclays Japan Aggregate

-1.1

0.1

-1.6

-0.9

-1.6

Bloomberg Barclays UK Aggregate

0.8

2.0

0.3

0.9

0.8

Bloomberg Barclays Euro Aggregate

0.0

1.2

-0.5

0.2

0.2

Currencies

Sterling

1.2

-0.4

0.2

US dollar

-1.2

-1.7

-1.0

Yen

0.4

1.7

0.7

Euro

-0.2

1.1

-0.7

Source: Bloomberg Barclays, MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Data as of 31 July 2023.

J.P. Morgan Asset Management

5

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