Monthly market update

Financial markets were generally weaker in July as geopolitical tensions escalated following renewed military action in the Middle East. The resulting uncertainty pushed oil prices higher, reigniting inflation concerns and weighing on both share and bond markets. Meanwhile, concerns about the scale of corporate spending on AI-related infrastructure also weighed on investor sentiment, particularly in technology-heavy markets.

In this update we look at some key drivers of July’s market performance.

Escalating tensions in the Middle East dampened sentiment during July, with concerns about potential energy supply disruptions becoming a key market focus. Attacks by Iranian-backed Houthi forces on vessels transiting the Red Sea heightened risks to global shipping and fuel supply chains.

These supply concerns contributed to a sharp rise in oil prices, which increased by almost 20% (in New Zealand dollar terms over the month). Higher energy prices renewed inflation concerns, leading bond yields to move higher. As bond yields rise, bond prices typically fall, creating a challenging environment for fixed income investments.

Meanwhile, global share markets delivered mixed performance over the month, with technology companies the primary source of weakness. Investor sentiment was affected by concerns over the scale of AI-related capital expenditure and whether future earnings growth will be sufficient to justify these investments.

The technology sell-off saw the Nasdaq 100 Index fall 6.6% in July (all returns in local currency terms), while the S&P 500 Index was down 0.1%. Other technology-heavy markets also weakened, with Japan's Nikkei 225 Index falling more than 8% and South Korea's KOSPI Index down more than 20%.

In contrast, European shares performed well. The Euro Stoxx 50 Index rose 0.6%, while the UK's FTSE 100 Index gained 3.6%. These markets benefited from greater exposure to defensive sectors and more traditional cyclical industries. New Zealand shares also posted a modest gain, with the NZX 50 Index finishing the month 0.6% higher.

Among individual companies, Microsoft and Amazon stood out following strong quarterly earnings results. Microsoft shares rose around 20% in July after reporting significant growth in its cloud business, while Amazon shares gained more than 10% after delivering its strongest revenue growth in more than four years.

Against the backdrop of persistent inflation concerns, central banks continued to focus on containing inflation. The Reserve Bank of New Zealand raised the Official Cash Rate (OCR) to 2.5% in July, with unanimous support from the Monetary Policy Committee.

Reinforcing the need for higher interest rates, Stats NZ reported annual inflation had risen to 4.1%, driven largely by higher fuel costs, electricity prices and council rates. The result increased the likelihood of further OCR hikes in the coming months.

Elsewhere, the US Federal Reserve (the Fed), the European Central Bank and the Bank of England (BoE) all left interest rates unchanged. However, dissenting votes in both the Fed and BoE highlighted ongoing concerns about inflation and suggested some policymakers see a stronger case for future rate increases.

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