July brought disparate performance in global risk assets as developed market equities and commodities mostly retreated, the US dollar strengthened, and credit spreads widened, while emerging market equities rallied and US Treasury yields rose. Second quarter US GDP rebounded strongly to a 4% annualized rate after shrinking 2.1% in the wintry first quarter. The monthly jobs report was strong, showing that employers added 288,000 jobs in June, with a drop in the unemployment rate to 6.1%; the labor force participation rate held steady at 62.8%. The Federal Reserve made a sixth consecutive $10 billion cut in its monthly asset purchases to a monthly rate of $25 billion, while acknowledging the recent rapid fall in unemployment and indicating that inflation has moved closer to their 2% annual target.
Global M&A activity continued to be robust in July. Notable deals announced in July included ADM’s acquisition of WILD Flavors for $3 billion, Generali’s sale of its Swiss private bank BSI to BTG Pactual for $1.7 billion, Lindt’s purchase of Russell Stover Candies for an undisclosed price, Whiting Petroleum’s acquisition of Kodiak Oil & Gas for $6 billion, AECOM’s acquisition of URS for $4 billion, Albemarle’s purchase of Rockwood Holdings for $6.2 billion, Reynolds American’s acquisition of Lorillard for $27.4 billion, Gtech’s purchase of International Game Technology for $4.7 billion, Abbvie’s $54 billion purchase of Shire, the $2.3 billion sale by Severstal of its US steel assets to Steel Dynamics and AK Steel, CIT’s $3.4 billion purchase of OneWest Bank, BCE’s acquisition of the remaining shares of Bell Aliant for $3.7 billion, BSkyB’s acquisition of Sky Italia and a majority of Sky Deutschland for $9 billion, Shenyin & Wanguo Securities’ $6.4 billion acquisition of Hong Yuan Securities, Dollar Tree’s purchase of Family Dollar for $8.5 billion, Zillow’s $3.5 billion purchase of Trulia, Klepierre’s $9.7 billion acquisition for $9.7 billion, and Meda’s $3.1 billion acquisition of Rottapharm.
Developed market equity markets mostly fell in July (see page 7), as Germany (-4.3%), France (-3.8%), and the S&P500 (-1.4%) led losses. US small caps underperformed sharply with the Russell 2000 down 6.1% (see page 4). Telecom (+3.7%), Information Technology (+1.5%), and Health Care (+0.1%) were the best performing US sectors, while Utilities (-6.8%), Industrials (-4.1%) and Energy (-3.3%) were the worst performing (see page 2). Large cap growth (-1.5%) slightly outperformed large cap value (-1.7%) in July (see page 3). Emerging Market equities were mostly higher in July (see page 8), with the biggest gains in China (+8.1%), Argentina (+6.3%), and Indonesia (+5.6%).
In currencies, the USD Index strengthened 2.1% in July (see page 9). The weakest developed market currencies against the USD were the Swedish Krona (-3.1%), the New Zealand Dollar (-2.9%) and the Swiss Franc (-2.4%). The USD was mixed against emerging market currencies with the biggest gains in the Indonesian Rupiah (+2.5%), Thai Baht (+0.8%), and the Chinese Yuan (+0.5%); the Russian Ruble (-4.9%), Brazilian Real (-2.2%) and Korean Won (-2%) weakened against the USD.
US Treasury yields rose in the belly of the curve in July (see page 11). 10 year rates closed the month at 2.56%, up from 2.53% at June month end. Investment grade and high yield credit spreads widened in July (see page 12); European sovereign spreads held steady and US swap spreads widened (see page 13).
In commodities, the GSCI index fell 5.3% in July (see page 10), with gains in Industrial Metals (+2.7%) and losses in Agriculture (-8.7%), Energy (-5.8%), Precious Metals (-3.1%), and Livestock (-2.6%). Within individual commodities, Coffee led gains (+11.4%), followed by Aluminum (+5.4%), Palladium (+3.6%), and Feeder Cattle (+3.4%); Corn (-14.7%), Cotton (-14.5%), Natural Gas (-13.7%), and Lean Hogs (-12.5%) weakened; Gold fell 3.1%.
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