A good week all round with the highlight being Sunday, not just because of the US-EU trade deal agreed then! Global equities gained 1.3% in local currency terms and 1.5% in sterling terms over the week on the back of growing optimism that trade deals might be on the cards. UK gilts and US Treasuries also both returned 0.5% on the back of yields drifting lower.
Equity returns for UK investors have been held back this year by the rise in the pound against the dollar. But global equities in sterling terms have now finally regained their February high and are up 4.5% year-to-date. In local currency terms, the gains have been a rather larger 4.1% and 9.2% respectively.
Japan was the star performer last week, gaining 4.7%. This came on the back of Japan and the US agreeing a trade deal which cut the level of US tariffs to 15% from the threatened 25%. Markets shrugged off the news that the ruling coalition has now lost its majority in both houses of parliament for the first time since 1955. However, this still leaves Japanese performance this year lagging that of most other major markets with only the US performing worse.
China also led the gains for the second week running, gaining 2.8%. Optimism over China-US trade talks helped, as did the start of construction of a major hydro-electric dam in Tibet which led to renewed focus on Chinese infrastructure spending.
Finally, the mood music from the US-EU trade negotiations turned more positive, ending with the trade deal on Sunday. This saw US tariffs cut to 15% from the threatened 30%, although as with Japan, this still remains above the baseline 10% rate already imposed. European market have opened this morning up a bit under 1% on the back of the deal.
On the macro side, the business confidence numbers for July for the US, EU and UK presented a mixed picture. Sentiment improved significantly in the US and a little in the EU but deteriorated in the UK. The downbeat mood in the UK – at least until Sunday – was reinforced by retail sales recovering in June less of their large May drop than had been hoped and news of a larger than expected public sector borrowing requirement for last month.
The ECB meeting saw no real surprise. It left rates unchanged and indicated it was in no hurry to change policy, now that rates were back down to 2% and around their neutral level.
Meanwhile, the US earnings season continued in the background. With around 30% of companies now reported, the S&P 500 are currently on course to see a gain of around 7.5%, a bit more (as is almost always the case) than forecast at the start of reporting.
Alphabet (Google) and Tesla both reported last week and highlighted the diverging fortunes within the so-called Magnificent Seven. Alphabet beat expectations and was up 4% over the week despite some concern about its ever-rising AI-related expenditures. Tesla, by contrast, reported another dismal set of results and ended the week down 4%.
Performance has diverged considerably within the Magnificent Seven of late despite these companies generally being viewed as a homogenous group of tech supremos. Whereas Nvidia is now up as much as 30% this year and Microsoft and Meta have also seen gains of over 20%, Apple and Tesla are actually down 15% and 20% respectively.
The reality is that the product mix and tech-related exposure of the Magnificent Seven varies significantly by company. It also shouldn’t be forgotten that they are engaged in an expensive battle amongst themselves to ensure they end up as one of the big winners rather than a loser from AI. As we saw with the spread of the internet, tech revolutions create both.
This coming week is a busy one. On Wednesday, the Fed meeting will almost certainly leave rates unchanged but will be watched closely for clues as to whether a rate cut is still on the cards for September. There are also second quarter GDP numbers out for both the US and Eurozone on Wednesday and US payroll data on Friday. In addition, Apple and Amazon report on Wednesday and Microsoft and Meta on Thursday.
Finally, Friday is the day when US reciprocal tariffs will in theory be imposed on the vast majority of countries who have failed to reach a deal with the US. Further trade talks are also scheduled between US and China with their current trade truce expiring on 12 August.
Rupert Thompson – Chief Economist