July was another positive month for growth assets. Meanwhile, fixed interest assets gained in value (yields fell), despite further rises in inflation that ordinarily would lead to rising bond yields.
Australia’s June quarter inflation figures were released during July, showing inflation running at an annual rate of 3.8%. Big contributors to inflation include household items such as +5.5% for vegetables and +4.7% for fruit, due to supply constraints and labour shortages. Globally we continue to see central bank and government stimulation; China’s central bank has reduced trading banks’ reserve requirement ratio by 0.5% in order to add liquidity by enabling banks to retain less money as reserves and therefore have more funds to lend to borrowers. In the USA, work is continuing to pass legislation that would see the largest infrastructure expenditure in decades.
An interesting development to note in July was the proposal for a global minimum corporate tax rate, a measure supported by 130 countries which aims to stop companies from diverting activities/earnings to low tax regimes. However, with some nations wanting to protect against themselves from potential lost tax revenue and job losses, it will take some time to work through the details.
The Australian share market was positive in July with large caps up 1.2% and the ASX continuing to reach all-time highs with Mergers and Acquisition activity increasing. International equities rose in the month, led by US equity markets, which gained 1.8% on a currency-hedged basis. The US dollar appreciated by 2% (seeing the AUD fall from US$0.7497 to US$0.7344), resulting in a 4.0% gain for unhedged international equity investors. Australian Listed Property benefitted from falling bond yields to rise 0.3% in the month.
Bond yields ended the month lower despite inflation ticking up. Investors focused on the rapid spread of the COVID Delta variant and its potential to slow economic growth. The Australian 10-year government bond yield declined 35bps to 1.18% and the 2-year government bond fell 2bps to 0.04%. In the US the 10-year government bond fell by 25bps to close at 1.22% while the 2-year government bond yield fell 6bps to 0.18%.
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