As we enter the summer holiday season, despite relatively positive economic data and strong corporate earnings, both equity and fixed income markets took a notable step back after what had been a very impressive rally for the year. There was no specific catalyst for the sell-off, however the European Central Bank’s (ECB) president, Mario Draghi, suggested that the European markets were improving and his hawkish tone implied that the central bank may need to review the current €60bn per month bond purchases as well as negative interest rates. As a result both equities dropped and bond yields rose.
Over the month the FTSE 100 fell 2.44% while the FTSE 250 also fell 2.94%, and in the United States, the S&P 500 held onto a modest gain of 0.62% while the NASDAQ dropped 2.40% in US dollars. In Europe, Italy was again the most resilient market dipping slightly (0.09%) while Spain, France and Germany suffered declines of 3.14%, 2.69% and 2.30% respectively in euros. With continued sterling weakness against the euro the figures translate slightly better when rebased to sterling.
Japan returned 2.14%, Asia, excluding Japan, returned 1.65%, China 2.41% and Emerging Markets 0.56%. All figures are in local currency terms.
Oil continued its decline falling a further 4.75%, commodities were relatively flat with a decline of 0.19% and gold declined 1.63%. The FTSE UK All Property Index held onto positive territory with a gain of 0.28%. Both government and corporate bonds saw a sharp increase in yields alongside poor equity market returns. The potential for reductions in Quantitative Easing and potential interest rate rises were the main drivers in performance. Long dated gilts fell 3.19% while shorter dated paper proved defensive with a 0.65% decline. Corporate debt proved a more resilient investment with longer dated issues declining 2.34% vs a 0.29% decline in shorter dated holdings.
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