August monthly market update - Reflections on July

Introduction

Share prices fell after a global IT outage rippled across financial companies and businesses. Major indexes slipped as airlines, train companies, banks, tech firms and media businesses were hit. They were among a raft of businesses taken offline following a major software outage linked to Microsoft.

The pound stayed stable and markets reacted positively to Labour's election win led by Sir Keir Starmer. A large Labour majority had been widely expected and priced into financial markets. Shares of major companies on the UK stock exchange inched higher, reflecting investor hopes for stability after years of volatility under the Conservatives.

UK inflation stayed at 2% in June – the Bank of England’s target. However, inflation in the services sector and core inflation were higher than expected, posing questions for the Bank of England on when to cut interest rates. Service inflation remained at 5.7%, the same as the previous month, while core inflation, excluding fuel and food, stayed at 3.5%.

The UK economy grew, faster than expected in May, driven by a strong performance from the construction sector. GDP rose by 0.4%, following zero growth in April when wet weather hit spending. UK wage growth slowed to 5.7% in the three months to May – the lowest level in two years. Unemployment remained unchanged at 4.4% in April, while the number of job vacancies fell by 30,000 amid a continued slowdown in hiring across the economy.

Mixed month for US stocks

US stocks had a mixed month after major tech companies posted profit reports that fell short of expectations, while a global cyber outage added to the uncertainty. President Joe Biden dropped out of the 2024 election and endorsed Vice President Kamala Harris, but this had little impact on markets.

The US Federal Reserve kept its benchmark interest rate steady at 5.25% to 5.50%, with many analysts now expecting a cut in September. US inflation slowed to 3% in the year to June, the slowest pace in a year, easing financial pressures on households.

US economic growth picked up in the second quarter, with GDP rising by 2.8%, up from 1.4% in the first quarter. The labour market started to ease in June, with 206,000 jobs added to the US economy, slightly down from May. Unemployment ticked up to 4.1%, a 0.1 percentage point increase from the previous month. US retail sales were also unchanged in June, increasing 2.3% on a year-on-year, defying Wall Street’s fears of a decline.

Macron faces hung parliament

European markets were mixed after a left-wing coalition won the most seats in the French parliamentary elections, beating Marine Le Pen’s far-right party. However, no party achieved a clear majority, leaving France in political uncertainty.

The European Central Bank (ECB) kept its key interest rate unchanged at 3.75%. ECB chief Christine Lagarde stated the debate on a possible cut in September is still undecided. The decision was in line with market expectations, amid concerns that geopolitical uncertainty and rapid wage rises will put pressure on inflation. It comes after the ECB lowered rates from a record high of 4% in June, putting it ahead of the US Federal Reserve and the Bank of England.

Euro area headline inflation dipped to 2.5% in June from 2.6% in May, while core inflation – which excludes food and energy – remained at 2.9%. Overall business growth across the region slowed sharply in June as expansion in the services industry failed to offset a further decline in manufacturing.

Germany’s economy suffered a fresh setback after factory orders fell for a fifth month in a row in May. Retail sales also rebounded, although slower than expected, rising by 0.1%.

China cuts key interest rates

To boost its slowing economy, China’s central bank has cut several key interest rates. Despite these efforts, falling house prices continue to hinder growth. The Chinese economy grew at an annual rate of 4.7% in the second quarter, below the expected 5.3%.

Retail sales growth slowed from 3.2% to 2% in the three months to June – the weakest in 18 months. Exports were higher than expected in June at 8.6% from the same time a year earlier, although imports fell 2.3%.

Weak consumer demand and reduced government spending are dragging on growth in the world’s second-largest economy. Additionally, a trade war with the West is intensifying, with Europe and the US announcing higher tariffs on electric vehicles and other goods