The value of the Australian Dollar increased against major foreign currencies, decreasing overseas investment returns when measured in Australian dollar terms. International and Australian fixed interest markets posted positive returns as yields fell.

The Australian Bureau of Statistics published the CPI inflation figure for Australia on 27 July. The CPI print was 6.1% year-on-year (i.e. the general price of goods and services rose by 6.1% from June ’21 to June ’22). The Reserve Bank of Australia (RBA) increased the cash rate target by 0.5% to 1.35% on 5 July, the first time the RBA has done back-to-back 50 basis point increases in its history. The minutes [1] of the RBA Board meeting showed a discussion on the neutral interest rate, a commonly discussed (and fundamentally unobservable) economic concept that is defined as the real interest rate that is neither expansionary nor contractionary. The minutes note the challenges of estimating the neutral interest rate and then converting that into a nominal interest rate. After drafting this article, the RBA hiked interest rates by 0.5% on 2 August.

New Zealand’s central bank, the Reserve Bank of New Zealand (RBNZ), continued to hike with its third consecutive 50 bps interest rate increase in July. Prior guidance from the RBNZ in October suggested the RBNZ believed their neutral rate of interest was 2%. The RBNZ’s most recent increase took their cash rate to 2.5% which is the first developed world central bank to lift their cash rate beyond their neutral rate estimate. The United States Federal Reserve increased interest rates by 0.75% to 2.25% for the second consecutive time. The European Central Bank (ECB) increased its deposit rate for the first time in eleven years, by 0.5% to 0%. In July, the ECB has implemented a new financial tool termed the “Transmission Protection Instrument” (TPI) in an effort to prevent fragmentation of Euro-area countries. 

The Ukraine-Russia war continued to grind on throughout the month of July with no end in sight. A deal agreed to by Ukraine and Russia which was brokered by Turkey and the United Nations was reached on 22 July that allows the export of Ukrainian grain and other agricultural products. A Russian blockade had stopped the shipment of millions of tons of basic food products to many foreign countries which has influenced price rises in food and contributed to the global food shortage. Shortly after the deal was struck, however, a Russian missile attack was launched on the port of Odessa, threatening to up-end the deal. Similarly, after reaching an agreement to increase natural gas flows into Europe, Gazprom (Russia’s state-run energy company) announced a further reduction in supply through Nord Stream 1 in late July, ostensibly due to important turbine maintenance, but many skeptics believe the reductions may be in retaliation to Western sanctions. Latest data suggests natural gas flows have reduced to around 20% of Nord Stream’s capacity.

Reported global COVID-19 case numbers exceeded 582 million at the end of July 2022, with cumulative global fatalities exceeding 6.4 million at the end of the month [2]. Australia has been experiencing another wave of infections in July as Omicron sub-variants BA.4 & BA.5 spread rapidly. Although BA.4 & BA.5 appear to have a lower mortality rate than other COVID-19 variants, their ability to reinfect people has made them highly transmissible and harder to avoid. On 2 July, Australia surpassed 10,000 deaths as a result of COVID-19 and ranked 15th out of all countries in total cases reported of infection. It is worth noting however that some countries have relaxed their COVID-19 reporting requirements. In early July, the Chinese Government imposed a proof of vaccine mandate for residents of its capital, Beijing, to enter a range of public spaces. These are the first vaccine mandates imposed on mainland China in the attempt to slow the spread of the infectious Omicron sub-variants, however, the mandate was reversed only two days later due to public backlash. 

Equities

Major developed foreign equity markets produced strongly positive returns in the month of July. Developed markets (excluding Australia) returned 8.0% on a currency-hedged basis (and 6.4% in Australian dollar terms, reflecting the rise in the value of the Australian dollar). The best performing of the major foreign markets was the United States’ (S&P 500 Index) returning 9.2%.

The Australian stock market (S&P/ASX 200 Index) generated a return of 5.7% during July, with 10 sectors (out of 11) contributing positive returns. Information Technology, Real Estate and Financials were the top performing sectors, with returns of 15.2%, 12.1% and 9.3% respectively. The sole sector to produce a negative return was Materials, returning -0.7%.

From a foreign developed market perspective, all sectors produced a positive return. Consumer Discretionary, Information Technology and Industrials were the best performers returning 15.6%, 13.2% and 9.5% respectively. Even the worst performing sector, Communication Services, returned 3.2%.

Bonds

The Australian government bond yield curve shifted downwards in July. The downwards shift resulted in positive Australian fixed interest returns for the month of 3.4% (Bloomberg AusBond Composite Index). The slope of the Australian government bond yield curve flattened substantially in July as the two-year yield decreased by 0.20% and the ten-year yield decreased by 0.60%. As noted above, the cash rate set by the RBA increased by 0.5%, from 0.85% to 1.35% on 5 July (the RBA increased cash rates by a further 0.5% to 1.85% on 2 August).

Over the month of July, major developed global government bond yields decreased resulting in positive returns, with the Bloomberg Barclays Global Aggregate Index returning 2.1%. Notably, European Government yields fell the furthest over both durations, falling 0.37% over two-years and 0.52% over ten-years. The spread between the United States’ ten- and two-year yields was -0.24% at the end of July, resulted in an “inverted” yield curve. An inverted yield curve in the United States is often taken as a sign that the bond market expects a recession within the next couple of years.

Currencies

The Australian Dollar appreciated against all major foreign currencies, with the exception of the Japanese Yen (where it decreased 0.6%), in July. The Australian Dollar increased in value against the Euro, Chinese Renminbi and United Kingdom’s Pound by 3.8%, 1.9% and 1.2% respectively. The Australian Dollar finished the month at 0.6985 US Dollars, up 0.8 US cents over the month. 

Commodities

The price of WTI oil decreased 6.8% and the price of Brent crude oil decreased 4.2% over the month as recession fears grow. The S&P GSCI Commodities index decreased by 2.3% for the month of July, with the price of natural gas futures notably increasing 51.7% (having experienced a highly volatile environment in prior months). Of the precious metals, the price of gold decreased 2.3% and the price of silver increased 0.4% in July. 

Performance of key markets over relevant time periods to 31 July 2022

Asset class	Index	Month* (% change)	FYTD* (% change)	1 year* (% change)
Australian Shares	S&P/ASX 200 Acc. Index	5.7%	-4.7%	5.7%
International Shares	MSCI World Ex Aust Unhedged A$	6.4%	-10.8%	6.4%
International Shares	MSCI World Ex Aust Hedged A$	8.0%	-13.0%	8.0%
US Shares	S&P 500 Index	9.2%	-12.6%	9.2%
UK Shares	FTSE 100 Index	3.7%	2.7%	3.7%
Japanese Shares	Nikkei 225 Index	5.3%	-2.3%	5.3%
Australian Listed Property	S&P/ASX 200 A-REIT Index	11.9%	-14.4%	11.9%
Australian Fixed Interest	Bloomberg AusBond Composite Index	3.4%	-6.4%	3.4%
Australian Cash	Bloomberg AusBond Bank Bill Index	0.1%	0.2%	0.1%
Currency	AUD/USD	1.2%	-3.8%	1.2%

*Percentage changes in returns are for periods over the month of July (Month), calendar year to date 31 December 2021 to 31 July 2022 and the financial year 30 June 2022 to 31 July 2022 (FYTD). Past performance is not an indication of future performance.

[1] https://www.rba.gov.au/monetary-policy/rba-board-minutes/2022/2022-07-05.html
[2] https://www.worldometers.info/coronavirus/

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