Our latest monthly Investment & Economic Update for July 2023 examines how the global investment markets, economy, and commodities perform.
UK Stock Market
The FTSE 100 index of leading UK company shares closed at the end of June at 7,531.53 points, up 85.39 points or 1.15% during the month.
In a last-minute surge, the FTSE 100 managed to end the month positively, although only slightly higher than its May closing.
The London stock market index closed up at the end of June thanks to favourable house price figures reported by Nationwide. Despite this improvement, the FTSE 100 remains lower than its starting point for the quarter, which was approximately 7,632.
Eurozone
Investment & Economic Update for July 2023 showed a good start to July.
Which meant that European indexes outperformed the FTSE 100 last week, with Germany’s Dax and France’s Cac 40 rising by 1.3%.
Similarly, the S&P 500 gained 0.9% in New York, while the Dow Jones increased by 0.6% after the European markets closed.
European stock indices showed modest gains in the first trading session of July, despite Eurozone manufacturing data indicating a decline in output for June.
The FTSE 100 in London, CAC 40 in Paris, and DAX in Germany all experienced a 0.2% increase by mid-morning.
Energy forecasts
The head of the International Energy Agency (IEA), Fatih Birol, has warned that energy prices may surge this winter, leading governments to intervene and subsidise bills again.
If the Chinese economy strengthens rapidly and a severe winter occurs, gas prices could rise, placing pressure on consumers. Birol stressed that governments should prioritise energy-saving measures and boost renewable energy sources.
However, a spokesperson for the UK government stated that energy bills are expected to decrease by an average of £430 this month.
The recent increase in gas prices followed Russia’s invasion of Ukraine, causing energy bills to rise globally. Several governments, including the UK, introduced support measures to alleviate the impact on households.
Birol cautioned that another spike in gas prices during the upcoming winter could not be ruled out.
If the Chinese economy remains robust and increases energy demand during a severe winter, natural gas prices may face significant upward pressure, further burdening consumers.
Recession warning
According to Bloomberg Economics, the Bank of England’s efforts to curb inflation may lead the UK into a recession by the end of the year.
Economists Dan Hanson and Ana Andrade predict that if the Bank raises interest rates to 5.75% by November, a year-long recession will occur, erasing slightly over 1% of economic output.
This shallow recession could take place just before the next election.
Hanson and Andrade emphasise that there is a risk that the data may not respond as expected to the Bank’s actions, potentially resulting in interest rates rising further than their baseline projection.
If borrowing costs surpass 5%, they believe the risk of a financial stability shock will increase exponentially.
The current inflation rate in the UK stands at 8.7%. Last week, the Bank of England raised interest rates to 5%, reaching a 15-year high, in an attempt to rein in inflation.
Recession-The Good, The Bad & The Ugly
Eurozone inflation
The annual inflation rate in the eurozone dropped more than expected in June to 5.5%, primarily due to significant decreases in energy prices.
This highlights a growing divergence with the UK, where inflation remains stubbornly high.
These figures contrast with the UK’s high annual inflation rate, which stood at 8.7% in May, the highest among G7 countries. There are concerns that the Bank of England may need to raise interest rates above 6% to bring inflation back down to its 2% target.
Separate data released on Friday showed that the UK had the slowest economic growth in the G7 during the first quarter of the year, apart from Germany, which is currently in a recession.
Energy exploration
Data and industry executives indicate that oil and gas companies are intensifying their search for new deposits, driven by the surge in fossil fuel prices resulting from the Ukraine war.
European majors, in particular, are leading this exploration revival, marking a renewed commitment to oil and gas after Shell and BP backed away from their promises to reduce output and invest in renewables as part of the energy transition.
This renewed appetite for oil and gas reserves and production represents a significant reversal for BP, which scaled back its exploration unit three years ago.
While exploration is a long-term and high-risk business, it has proven to be a more reliable source of profit for energy majors than the distinct business model of renewable energy production.
Asian slump
Business surveys reveal that Asia’s factory activity experienced a slump in June, with sluggish demand in China and advanced nations clouding the outlook for the region’s exporters.
While manufacturing activity in China expanded marginally, powerhouses Japan and South Korea saw a contraction, indicating that Asia’s economic recovery is struggling to maintain momentum.
These surveys highlight the impact of China’s weaker-than-expected rebound from COVID-19 lockdowns on the region. Manufacturers in Asia are also preparing for the consequences of aggressive interest rate hikes in the United States and Europe.
House prices
Contrary to expectations, UK house prices experienced a slight increase between May and June, demonstrating resilience in the face of rising mortgage rates, as reported by mortgage provider Nationwide. Property prices rose by 0.1% this month, surprising economists anticipating a 0.3% decline.
Compared to June of the previous year, house prices were down by 3.5%, remaining relatively unchanged from the previous month’s figure of 3.4% and performing better than the projected decline of 4% forecasted by analysts.
However, this still marked the fastest annual decline since 2009.
Martin Beck, chief economic adviser to the EY Item Club, noted that considering the substantial price gains in previous periods and the challenges posed by increasing mortgage rates and other financial pressures, the resilience displayed by house prices is unexpected.
