Quilter Cheviot|Weekly Comment

Stocks pull back after recent gains

Our weekly market overview from Quilter Cheviot

By Alan McIntosh, Chief Investment Strategist

Global stock markets pulled back last week after closing out a strong July, with the MSCI All Country World Index falling 2.3% on the week, ending July 3.7% higher and up 15.5% year-to-date. It was a busy week for corporate releases and economic data, headlined by big tech results, the Bank of England delivering another interest rate increase and the monthly US jobs report.

The Bank of England (BoE) raised its base rate to a 15-year high of 5.25%. There was some speculation of another 50 basis point move following June’s increase, but rate setters ultimately decided on a smaller incremental rise. Six of the nine Monetary Policy Committee voted for the 25 basis point move, two voted for a 50 basis point increase and one voted to keep rates unchanged. 

The news caused a small decline in market expectations for the BOE’s terminal rate to around 5.60%,, showing two further 25 basis point increases this year. The market had shown a terminal rate of well over 6% just a couple weeks ago. Last week’s increase was the 14th in a row following a policy meeting and there are growing signs that the swift and largescale tightening of monetary policy over the last 18 months is weakening the UK housing market. Mortgage rates are now at their highest levels since 2008 and house prices declined 3.8% year-on-year in July, according to a Nationwide index – the biggest drop since July 2009.

UK stock benchmarks held up better than global peers last week, declining 1.5% to take 2023 gains to 3.8%. Sterling pulled back against the US dollar to close at 1.27, down from 1.29. UK gilts yields edged higher, with the 10-year yield ending at 4.38%, up six basis points on the week.

US labour market cooling

The July US jobs report came in lower than forecast, as 187k non-farm jobs were added. There was also a downward revision to the two previous month’s figures, now standing at 185k in June and 281k in May. The slower pace of jobs growth came with a dip in the unemployment rate to 3.5% while wages grew at an annualised 4.4%.

Taken together the data was broadly supportive for those in the “soft landing” camp and caused a reversal of the move in US Treasuries following a blowout private employment release a couple of days earlier. The 10-year Treasury yield ended the week at 4.04%, up from 3.95% but pulling back from the weekly highs of around 4.20%. The move higher earlier in the week came after news that Fitch ratings had cut the US debt rating and the US Treasury announced larger debt auctions in the coming months to rebuild reserves and finance a growing budget deficit. 

Rising yields weighed on growth stocks which underperformed their value counterparts on the week, with technology-heavy indices suffering larger losses to end down by 2.8%. Still, this comes after a 4.1% rise in July and 33.5% year-to-date. Broader based US indices closed the week down 2.3%, ending July 3.2% higher and up 17.7% for 2023.

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