(Source: Merlea Macro Matters)

Summary

Global Market Turmoil and the End of Easy Money

Monday’s global market turmoil was anticipated, driven by short-term pressures like the unwinding of the yen-based carry trade. In this trade, speculators borrowed yen to invest in riskier assets. As they pulled out, stock markets dropped and Treasury yields fell, as investors sought the safety of U.S. government securities. Money is likely moving into the Federal Reserve’s overnight reverse repurchase facility. The Fed will ensure that financial markets are stable and have enough liquidity. While we don’t expect an emergency rate cut, there’s a stronger case for a significant 50 basis-point reduction at the next Fed meeting on 18^th September. If the market volatility continues and inflation or jobs data weaken, an intermeeting rate cut could be considered.

Currently, the Fed is cautious, avoiding actions that could heighten panic. The RSM US Financial Conditions Index is just below neutral, indicating a slight drag on economic activity. The VIX, a measure of market volatility, is above 40, suggesting investors might soon capitulate.

As hedge funds typically fund their bets through borrowing, their adjustments are exacerbating market moves. Banks give hedge funds leverage, essentially a loan to fund investing, which amplifies hedge fund returns but can also increase losses.

The unwind of the carry trade, along with rising interest rates in Japan and upcoming U.S. policy changes, is causing the yen to strengthen sharply. This marks the end of an era of low interest rates and easy money, which had allowed for leveraged trades with minimal risk. Despite market volatility, the U.S. economy shows signs of strength. Real final private demand grew at 2.6% through June, and 84% of prime-aged workers are employed, a multidecade high. The Institute for Supply Management’s services index in July indicated positive sentiment and hiring in the service sector, suggesting that a U.S. recession is not imminent despite fears of the opposite.

The reset in financial markets is not too surprising, but the speed and volatility have caused some consternation. The shift away from easy money and low interest rates is a major change for the global economy. While the current market turmoil is unsettling, it may not be the last of the volatility, with possible impacts on private credit, commodities, and oil markets. However, not all market sectors are experiencing the same downturn. Four sectors in the benchmark index that have performed relatively well are gold, real estate, utilities, and consumer staples. These are often considered safe havens during market instability and have outperformed as investors seek stability. Similarly, ultra-safe bonds have seen increased interest, with U.S. Treasury yields at yearly lows as traders seek the security of government debt.

Bonds

Bank of Japan Tightening Policy: What Does It Mean?

The Bank of Japan (BoJ) is becoming more cautious, signalling changes ahead. They announced a plan to cut their bond purchases by half by early 2026 and raised their policy rate from 0-0.1% to 0.25%. This indicates their growing confidence in economic activity and inflation, with possible further rate hikes that could bring the cash rate to 0.5% or slightly higher by the end of the year.

There’s a concern that this could trigger a reversal of the Yen carry trade, where investors borrowed cheaply in Yen to invest in global assets. Such a shift might affect assets like U.S. and Australian bonds and, indirectly, shares. However, the impact is expected to be limited since Japanese rates will still be lower than those in other countries for a while.

Bond yields remain significantly higher than was the case at the start of 2022, attributed to three key factors, first the Fed’s policy response to inflation. Second is the strength of the U.S. economy. Finally, an increasing supply of U.S. Treasury securities are coming to the market.  New Treasury bond issuance is growing due to a combination of federal government that must be funded and the higher interest costs associated with today’s elevated interest rates. At the same time issuance is up, the Fed, as part of its monetary tightening policy, began allowing its large portfolio of U.S. Treasuries and agency mortgage-backed securities to mature.

Bond investors are closely monitoring Federal Reserve (Fed). After raising rates dramatically over a 16-month period ending in July 2023, the Fed has held the line on the short-term federal funds target rate it controls. However, investors appear to be anticipating that the Fed is likely to reverse its interest rate policy and begin cutting rates, perhaps as early as September 2024.

Treasury yields have been moving lower at both ends of the curve since July on hopes that the Federal Reserve will lower interest rates in 2024, with market odds on a September rate cut reaching 100%. Interest rates and bonds have an inverse relationship: when rates go down, bond prices go up and yields decline.

Yields dropped further Friday as a rise in unemployment increased recession fears and economists, worried the Fed might have acted too slowly, predicting even deeper rate cuts for 2024.  The US yield curve is now close to having a positive inversion, with the 30yr yield holding above 4.11%. This boosted investors’ appetite for bonds, helping drive long-term interest rates lower.

Meanwhile, the global trend of easing monetary policy continues. It started in emerging markets and has spread to developed countries. Recently, Switzerland, Sweden, Canada, and the European Central Bank have all cut rates. The Bank of England has followed suit. In Australia, lower-than-expected inflation has reduced the likelihood of another Reserve Bank of Australia hike, setting the stage for a potential rate cut by February next year.

Typically, lower interest rates are positive for stocks. However, this isn’t always the case when there’s a looming recession, which seems to be a growing concern for investors. Falling commodity prices and bond yields may also reflect these recession fears.

Listed Property

REIT total returns are highly correlated with Treasury yield movement. REITs are sensitive to interest rates due to three main reasons:

• Financing Costs: Changes in interest rates directly impact REITs’ borrowing costs, which can influence net profits and the distribution per unit (DPU) available to shareholders.
• Property Valuations: Interest rate movements can affect property valuations through their influence on discount rates used in valuation models, potentially impacting a REIT’s net asset value (NAV).
• Yield Competitiveness: Interest rate adjustments can alter the relative attractiveness of REIT yields compared to other investment options such as government bonds, potentially influencing investor preferences.

The end of write-downs in the commercial property portfolios held by listed landlords could be approaching, as the interest rate cycle is expected to shift in Favor of real estate investment trusts (REITs). During the February reporting season, REITs experienced significant asset value declines, more so than in recent periods. These declines were largely due to substantial increases in the capitalisation rates applied to office and industrial portfolios.

Capitalisation rates, or cap rates, are a key industry metric like an expected investment yield, which generally move inversely to property values. As cap rates rose, the value of these assets decreased. Further asset value declines are likely in the Jun-24 half, but we see limited scope for declines beyond that given a favourable rate outlook in the second of calendar year both globally and in Australia,

We are positive on REITs into this rate stabilisation with key picks in sub-sectors with favourable demand supply dynamics including industrial, alternatives (land lease and self-storage) with recovery likely to benefit residential and fund managers.

Australia’s REIT sector was hit hard two years ago as investors sold out in response to rising bond yields – a key marker for stocks in listed real estate – and as inflation soared, post pandemic. But, over the past year, the sector has bounced back strongly, gaining close to 24 per cent and outperforming the broader equities market, as investors grew more confident the end of the rate cycle was in sight.

Pricing of REIT stocks has been far more volatile than the valuations of portfolios underlying those businesses, as the impact of property market disruption has lagged. A handful of recent major deals in the office market has realised hefty discounts, as that gap closes.

Unsurprisingly, historical data reveals a strong correlation between Global REITs returns and Treasury yield movements. For example, from late 2021 to mid-2023, when the 10-Year Treasury yield increased by 332 basis points, global REITs experienced a 31% decline. Conversely, in the fourth quarter of last year, when the 10-year Treasury yield decreased by 102 basis points, global REITs rebounded with a 21% return.

If interest rates do fall as anticipated, this could favourably impact REIT prices. Global REITs have historically outperformed global equities at the end of Fed tightening cycles. On average, in the four quarters following the conclusion of a Fed tightening cycle, public real estate has delivered a 20.9% return, surpassing the 17.3% return of global equities. This historical trend could signal a promising opportunity for investors in the current market environment.

Australian Equities

Australia’s economy is experiencing a challenging period characterized by slowing growth and persistent inflation, creating a stagflation environment. The surge in immigration has supported aggregate growth and inflation, but this masks the underlying impact on per capita growth, leading to what is being described as a “per capita recession.” This situation raises the question: could Australia face an outright recession in 2024?

The current outlook suggests that while overall growth is decelerating, inflation is not falling as quickly as in other developed economies. This creates a dilemma for the Reserve Bank of Australia (RBA), which must balance the risk of persistent inflation against the threat of a broader recession. The expectation is that weak growth may eventually lead to lower inflation, prompting the RBA to ease monetary policy and thus potentially lower bond yields.

Australia’s economic challenges are compounded by a significant increase in immigration, which has surged from an average of 110,000 annually pre-COVID-19 to 600,000 in 2023. This influx has led to a disconnect between aggregate and per capita growth, as the larger population does not translate into higher individual wealth. The federal government’s plan to maintain high immigration levels could help sustain aggregate growth but might not prevent a recession if per capita growth continues to decline.

Moreover, Australia’s current economic conditions bear similarities to the 1992 recession, with declining household income and consumption, as well as rising credit card usage due to insufficient income. Consumer confidence is low, and the cost of living is rising, putting stress on households. The divergence between mining and non-mining sector profits further complicates the economic landscape, with weakening mining profits following falling commodity prices, while non-mining profits show some resilience.

Trade is also facing challenges, with a weaker Australian dollar making imports more expensive and exports less competitive, further hampering growth. The global economic downturn, particularly in key markets like China, exacerbates these issues.

Despite these challenges, a recession is not inevitable if employment remains strong. The labour market, though under stress with shifts from full-time to part-time work and reduced hours, has so far prevented a full-blown recession.

Australia population versus dwelling completions

The housing market also plays a crucial role, as it contributes significantly to inflation through rising costs of construction, rents, insurance, and electricity. The RBA faces a “self-defeating loop” in managing this issue, where increasing interest rates to curb inflation could discourage residential investment, worsening the housing shortage and perpetuating inflationary pressures. Thus, a balanced approach to monetary policy will be critical in navigating these economic challenges.

The Reserve Bank of Australia (RBA) faces a dilemma: raising interest rates to combat inflation also discourages residential investment, worsening the housing shortage. This creates a cycle where increased housing demand boosts inflation, prompting the RBA to hike rates, which then constrains construction. With a current housing vacancy rate of just 1.1%, this dynamic presents a unique challenge for the RBA, which primarily has tools to influence demand rather than supply.

In summary, while Australia faces significant economic challenges, strong employment levels may prevent a recession. However, the housing market’s impact on inflation and the RBA’s policy decisions will be critical in determining the economy’s trajectory.

America

The US economy is expected to continue to lose momentum near-term as high prices and elevated interest rates sap domestic demand. Real GDP growth slowed dramatically to 1.4 percent quarterly annualized in Q1 2024 (from 3.4 percent in Q4 2023), and probably expanded at a clip not much faster than this in Q2. While we do not forecast a recession in 2024, we do expect consumer spending to cool further and real GDP growth to decelerate to around 1 percent quarterly annualized in Q3 2024.

The narrative of a “soft landing” for the economy quickly shifted to concerns about a harder landing. The S&P 500 experienced its worst reaction to jobs data in nearly two years, while a significant drop in key technology stocks pushed the Nasdaq 100 down over 10% from its July peak. Treasuries rallied for a seventh consecutive day, with traders anticipating that the Federal Reserve will cut rates by more than a full percentage point in 2024.

The market has grown anxious that the Fed might be lagging in cutting interest rates following a weak jobs report. This concern comes after a strong run in the US stock market earlier this year, suggesting a correction might be overdue. While key support levels on the S&P 500 at 5200, 5000, and 4800 are expected to hold, the market correction could continue in the near term.

The US stock market, which is near the high end of its historical valuation range, is particularly sensitive to negative news. This contrasts with international equity markets, which have lower price-earnings ratios. However, US market sentiment often influences global markets.

Despite these market concerns, the US economy is still expanding, and jobs are being added, though the unemployment rate could rise quickly. Fed official Austan Goolsbee emphasised that the central bank won’t overreact to a single labour market report, highlighting the Fed’s data-dependent stance.

Any increase in unemployment may prompt the Fed to act, possibly leading to a 50-basis point rate cut at the September Federal Open Market Committee (FOMC) meeting. Jerome Powell may need to take decisive action before the November elections, potentially opening the door for another rate cut by year-end, depending on labour market conditions.

U.S. services sector activity rebounded from a four-year low in July amid a bounce back in new orders and the first increase in employment in six months, which could help to quash fears of a recession that have been sparked by a surge in the unemployment rate and an ongoing stock market sell-off.

 Positive economic data was overshadowed by broad investor fears. The Institute for Supply Management’s (ISM) services PMI rose to 51.4% in July, indicating sector expansion for the 47th time in 50 months, up from 48.8% in June. The improvement in the composite index was driven by increases in the Business Activity, New Orders, and Employment indexes, despite a decline in the Supplier Deliveries Index. Survey respondents reported that increased costs were impacting their businesses, with generally positive commentary on business activity either remaining flat or expanding gradually. Concerns over potential tariff increases and a more stable but costly supply chain environment were also noted.

Faster Activity Likely Later this Year and in 2025

GDP growth should pick up later in 2024 as inflation subsides and the Fed first signals and then actually cuts interest rates. In 2025, 2-percent inflation and somewhat lower interest rates should levitate real GDP growth to its potential near 2 percent. Nonetheless, the timing and pace of interest rate cuts remains highly uncertain and policy rates may ultimately land at levels exceeding the pre-pandemic average.

Europe

The eurozone’s anticipated soft landing materialized, with GDP rising by a solid 0.3% in Q1 2024 after five quarters of near stagnation and a slight contraction at the end of 2023. This growth was driven by net exports, private consumption, and construction, despite business investment and inventories lagging.

The mild winter of 2023-2024 likely boosted construction, and this effect may not persist. However, the primary driver of growth has been an improved terms of trade due to lower energy prices, which have helped; reduce inflation, lower lending rates, and boost confidence among consumers, businesses, and investors.

The European labour market’s resilience, with unemployment rates at historical lows, has also contributed to economic growth. Wages have been growing faster than consumer prices, increasing by 5.0% year-on-year in Q1 2024 compared to 2.9% for the consumption deflator, restoring household purchasing power lost during the energy crisis.

We expect the ECB to adopt a cautious stance, waiting for confirmation of inflation–especially core inflation–from hard wage data and staff projections before deciding on further rate cuts.

Despite a peak in job vacancies, they remain high, preventing a rise in unemployment. Moreover, households, especially in Germany, have yet to fully benefit from falling gas prices, which should become more noticeable by the end of the year as retail tariffs adjust.

As lending rates continue to fall due to easing monetary policy, investment, particularly in housing, is expected to increase. The latest ECB bank lending survey indicates a substantial rise in demand for housing loans, suggesting strengthening domestic demand through consumer spending in the latter half of 2024 and investment in 2025.

Germany emerged from recession in Q1 2024, partly due to lower energy costs boosting production in energy-intensive sectors. However, its growth lags other major European economies like Spain, which has experienced strong GDP growth due to a rebound in tourism and robust industrial production.

Inflation fell to 2.4% in April 2024 from a peak of 10.6% in October 2023 but rose slightly to 2.6% in May, mainly due to base effects. The ECB is likely to proceed cautiously with rate cuts, awaiting clear signs of reduced inflation and steady growth, potentially implementing five more rate cuts totalling 125 basis points by mid-2025.

The European Commission’s actions and global economic relations, particularly with China, remain key uncertainties, influencing financing conditions and investment recovery.

United Kingdom

In a move that sparks cautious optimism, the Bank of England (BoE) has cut its benchmark interest rate to 5.0%—the first reduction in over four years, down from a 16-year high of 5.25%. This decision provides some relief to households and businesses still reeling from inflationary pressures caused by the COVID-19 pandemic and geopolitical tensions, notably Russia’s invasion of Ukraine.

The rate cut coincides with data showing British manufacturers outperforming their counterparts in Europe and Asia in July, and it has positively impacted the British stock market. The FTSE 250 index reached its highest level since February 2022, though gains were tempered later in the day due to concerns over the U.S. economy. This development is a positive sign for Prime Minister Keir Starmer’s new government, which prioritises economic growth, especially through reforms aimed at improving productivity.

However, the pace of economic recovery remains modest, with growth expected at around 1% annually between 2024 and 2026. The BoE’s decision was narrowly passed with a 5-4 vote by the Monetary Policy Committee, reflecting ongoing concerns about inflation risks. Governor Andrew Bailey emphasized that the rate cut does not signal the beginning of a series of rapid reductions in borrowing costs, noting that the economy’s recent stronger performance could maintain inflationary pressures.

The unemployment rate notched up to 4.2% from 3.9%, the highest since last summer. Meanwhile, both headline measures of employment fell. We would however expect wage growth to slow further into the summer, reaching the 4-4.5% area. A BoE survey of Chief Financial Officers has been pointing to both lower actual and expected wage settlements.

While the rate cut marks a significant shift, it is only a slight retreat from a period of 14 consecutive rate hikes. While the financial situation for households and businesses remains challenging, with wage growth at nearly 6%, roughly double the rate aligned with the BoE’s 2% inflation target.

The BoE has revised its forecast for UK economic growth in 2024 to 1.25%, up from a previous estimate of 0.5%, suggesting the UK may outpace France, Italy, and Germany. However, the outlook for 2025 and 2026 remains unchanged at 1% and 1.25%, respectively, significantly below pre-2008 financial crisis levels.

In her response, Finance Minister Rachel Reeves acknowledged the difficult path ahead. With borrowing costs still high and public finances under strain, she hinted at potential tax increases in the upcoming budget. “This government is making tough decisions now to strengthen the foundation of our economy after years of low growth”, underscoring the challenges that lie ahead.

 Japan

Japan’s economy likely rebounded in the April-June period after a contraction in the previous quarter, driven by increased factory output and consumption, according to a Reuters poll. This recovery may bolster the Bank of Japan’s (BoJ) rationale for further interest rate hikes. However, the recent appreciation of the yen and potential slowdown in the U.S. economy pose risks to Japan’s export-dependent growth.

Economists forecast that Japan’s real GDP grew at an annualized rate of 2.1%, recovering from a 2.9% decline in the prior quarter. Private consumption, buoyed by significant wage increases from spring negotiations, likely rose 0.5%, marking the first rise in five quarters. Capital expenditure is expected to have increased by 0.9% after a 0.4% decline in the previous period, indicating optimism in corporate investment.

Despite these encouraging signs, net external demand likely reduced GDP growth by 0.1 percentage points, a smaller impact compared to the previous quarter’s 0.4-point drag. Preliminary second-quarter GDP data will be released on August 15.

The US dollar collapsed across Asia on Monday as markets were hit by a massive sell-off that saw the Japanese Nikkei suffer its worst one-day loss since “Black Monday” in 1987.

 The BoJ’s recent interest rate hike and potential for further increases reflect confidence in a consumer rebound as wage hikes filter through the economy. However, the strengthening yen has sparked concerns about the end of the “carry trade” and has led to significant volatility in Japanese stocks.

It is amazing what has occurred in Japan over the past several days, and whilst I expected the yen to surge against the dollar, the speed of the selloff in Japan’s stock market was astounding, with nothing really changing in terms of the favourable economic backdrop. After an epic plunge on Monday, the Nikkei index posted its biggest single-day point gain in history, rocketing over 3,200 points. This massive surge came as investors snapped up bargains after a brutal sell-off in the two prior trading sessions. The rebound was aided by a softer yen. Japanese economists say the latest market fluctuations are a short-term phenomenon and not necessarily a sign of significant structural deterioration in the nation’s economy.

While corporate Japan’s fundamentals remain solid, recent stock market volatility highlights the complexities of the economic landscape. Concerns about a potential U.S. economic slowdown, particularly in key sectors like the automotive industry, add to the uncertainty. Meanwhile, the economic stimulus package being compiled by the government and the ruling Liberal Democratic Party this year may be large-scale to address the uncertain economic outlook.

The major downside risks to Japan’s economy are many, centring on overseas economies. Specifically speaking, these are Trump winning the US presidential election, growing tensions in the Middle East and Ukraine, emergence of China’s excessive debt problem, intensification of US-China conflict (emergence of economic security risks, etc.), and domestic longterm interest rate highs and sharp appreciation of the yen. As Japan navigates these challenges, it will need to balance domestic economic recovery efforts with external risks to sustain growth.

China

China’s economy grew much slower than expected in the second quarter, hampered by a prolonged property downturn and job insecurity that undermined a fragile recovery. This slowdown has kept alive expectations that Beijing may need to implement additional stimulus measures. The consumer sector is of particular concern, with retail sales growth dropping to an 18-month low as deflationary pressures led businesses to slash prices on goods ranging from cars to food and clothing. The decline in property and stock prices, coupled with low wage growth amid widespread cost-cutting, is shifting consumer spending towards necessities.

The property crisis, which has persisted for years, deepened in June as new home prices fell at their fastest rate in nine years. This has further eroded consumer confidence and restricted the ability of debt-laden local governments to generate revenue through land sales. Economic growth in China has been uneven, with industrial output outpacing domestic consumption, raising deflationary risks amid the property slump and rising local government debt. While robust Chinese exports have provided some support, escalating trade tensions now pose a significant threat.

The latest data revealed that factory output in June exceeded expectations, although growth slowed compared to May. This follows an earlier report indicating an 8.6% increase in exports year-on-year for June, while imports unexpectedly decreased by 2.3%. This trend suggests that manufacturers may have been frontloading orders to circumvent upcoming tariffs from trade partners. The more significant concern, however, was retail sales growth, which rose only 2.0% year-on-year, missing forecasts and marking the slowest increase since December 2022.

In response, China’s central bank governor has pledged to maintain a supportive monetary policy. Officials have affirmed existing measures for the second half of the year and emphasized longer-term goals, such as developing advanced technology and other “new growth drivers.”

Official data show that the world’s second-largest economy grew by 4.7% in the April-June period, the slowest rate since the first quarter of 2023, falling short of the 5.1% forecast. The growth rate also slowed from 5.3% in the previous quarter.

With domestic demand still weak, Beijing is expected to introduce more stimulus measures, potentially targeting the real estate sector or increasing fiscal spending. The government has announced plans to implement programs such as ultra-long government bonds and planned central government spending. Specifically, the National Development and Reform Commission and Ministry of Finance announced a 300-billion-yuan ($41.5 billion) initiative to subsidize business equipment upgrades and consumer purchases of appliances and cars, aiming to boost consumption.

China will place a greater emphasis on “promoting consumption,” particularly in sectors like education, elderly care, childcare, housekeeping, tourism, and sports, to sustain growth if the export sector falters. Recent improvements in Chinese trade have been largely driven by inventory restocking rather than a genuine increase in demand. However, with the Caixin/S&P Global manufacturing purchasing managers’ index falling to 49.8 in July from 51.8 in June, cooling external demand indicates that the temporary boost from export front-loading activities may soon diminish.

Emerging markets

High inflation has traditionally been a source of risk for emerging markets, impacting local currencies, fiscal balances, and domestic consumption. However, the current landscape is different. Over the past three years, while global inflation surged due to COVID-related monetary and fiscal stimulus, emerging markets experienced more measured stimulus compared to the US and Europe. Additionally, emerging market central banks were quicker to implement tighter monetary policies, resulting in less severe inflation across most of these economies.

As a result, emerging markets have been less affected by high policy rates, and consumers have maintained more purchasing power. Lower inflation and a more cautious monetary policy response have benefitted emerging market economies, which now have better growth prospects than the US and Europe. While there are concerns about whether central bankers in developed markets can achieve a soft landing for inflation, emerging markets present more favourable scenarios for investors.

In Asia, robust growth in countries like India, Indonesia, the Philippines, and Malaysia is expected to offset concerns about China’s growth outlook. The global oil market is predicted to remain in deficit, benefiting oil producers in emerging markets. Additionally, there is a positive outlook for other commodities, with increased demand for raw materials related to energy transition and advanced technology, as well as sustained high prices for precious metals amidst global uncertainty.

While individual risks remain due to the diverse nature of emerging markets, structural changes in global value chains and domestic economies are likely to support overall growth in 2025. The geopolitical landscape in 2024, with numerous elections worldwide, has been relatively stable in terms of market reactions, even when outcomes were unexpected or not market friendly.

EM corporate issuers generally have greater financial flexibility than their developed market counterparts, with lower leverage ratios. Looking ahead, the favourable economic outlook in emerging markets compared to developed markets and the normalization of rates in the US and Europe should attract more capital to higher-yielding international assets.

Despite global economic uncertainties, emerging markets’ growth, driven by strong domestic economies, benefits various corporate sectors.

It is likely that emerging-market equities will continue to narrow the gap with developed markets in the coming months as emerging-market economies and earnings improve, especially since huge valuation differences exist between the two.

At the end of 2023, the return on equity (ROE) in developed markets, as represented by the MSCI World, was 16.0%, the highest ever versus emerging markets, which stood at 11.3%. The large difference is due in part to emerging markets’ lower exposure to technology and slower economic recovery from the pandemic as government stimulus in emerging markets was more limited. We foresee a rebound this year in emerging-market ROEs, while ROEs in developed markets should not change much.

Gold

Gold has been a standout performer this year, rising 18.5% and reaching record highs. Gold closed at $2,443.29 per ounce on August 2, maintaining much of its annual gains after hitting an all-time high of $2,483.60 on July 17. The World Gold Council’s latest quarterly report revealed total demand reached 1,258.2 metric tons in the second quarter, the highest ever for this period and up 4% from 2023.

However, a closer look at the data suggests potential challenges ahead. The largest demand increase came from the Over The Counter (OTC) market, involving institutional investors, high-net-worth individuals, and family offices. This segment saw a 53% year-on-year rise to 329.2 tons, a significant jump from the previous quarter. The surge is attributed to “portfolio diversification,” raising concerns about the sustainability of this demand once investors feel adequately exposed to gold.

Conversely, consumer demand showed signs of weakness. Jewellery consumption fell 19% to 390.6 tons, while official coin demand dropped 38% to 52.7 tons. This decline reflects consumers pulling back due to high prices. In China and India, the largest markets for physical gold, jewellery demand dropped 35% and 17% respectively. China’s net imports via Hong Kong also fell by 18% in June, indicating waning interest.

India might see a temporary boost in demand this quarter following a cut in import duty from 15% to 6%, but this is expected to be a short-lived effect. ETFs also experienced a net outflow of 7.2 tons in the second quarter, following a substantial 113-ton drop in the first quarter. Central bank buying decreased to 183.4 tons, down from 299.9 tons in the first quarter, though still 6% higher than the same period last year. Despite these mixed signals, gold continues to attract investor interest, driven by expectations of monetary easing, particularly potential rate cuts by the U.S. Federal Reserve. Geopolitical tensions and political uncertainty, especially with a tight U.S. presidential election looming, are likely to keep gold attractive as a haven. These factors may result in gold prices stabilising within a relatively narrow range for the rest of the year.

WTIS

Oil prices have faced downward pressure, falling from around $85 to below $75 per barrel for West Texas Intermediate (WTI) over the past month. This decline is primarily driven by concerns over weaker demand from China and fears of a potential U.S. recession, which have dampened future demand expectations. The oil market has been further influenced by the prospect of a recession in the U.S., leading to increased selling pressure among traders.

However, the downturn in oil prices has been somewhat mitigated by uncertainties surrounding crude oil supply, particularly due to losses from Libyan output and rising tensions in the Middle East. Additionally, a weaker U.S. dollar and hopes for a Federal Reserve rate cut have provided some support at lower price levels.

Looking ahead, the short-term outlook for oil remains bearish, with expectations of further price weakness this week. A key factor to monitor will be the response from OPEC+. The organization had planned to increase production in October, but recent statements suggest this decision could be paused or reversed depending on market conditions. While geopolitical risks in the Middle East could push prices higher, the prevailing concerns over demand currently outweigh potential supply disruptions, contributing to the recent price decline.

Agriculture commodities

The Indian Ocean Dipole (IOD) significantly influences weather patterns in the Indian Ocean region. A positive IOD generally causes increased rainfall and potential flooding in East Africa, stronger monsoon rains in India, and a higher risk of drought in Indonesia, while reducing rainfall and increasing temperatures in central and southern Australia.

Between June and August 2024, below-average rainfall is forecasted for South America and South Africa, while most southern hemisphere crop-producing regions may see average to above-average rainfall. In the northern hemisphere, the eastern United States is expected to receive average to above-average rainfall, while central and western areas may experience below-average precipitation. Canada, much of the EU, southern India, and China are also likely to receive average to above-average rainfall, whereas parts of the UK and Ukraine are expected to be drier. Rainfall may help replenish soil moisture in western Russia.

There is a high likelihood of a La Niña event developing, which typically results in below-average rainfall in East Africa, Central and South Asia, southern South America, and parts of North America, while increasing rainfall in Australia, Southeast Asia, southern Africa, Central America, and northern South America.

Sector	12 Month Forecast	Economic and Political Predictions
AUD	65c-72c	Overall, the RBA is in no hurry to ease policy, expecting it will take some time before inflation is sustainably within the 2-3% target range Moreover, the potential easing by the Fed, contrasted with the RBA’s likely prolonged restrictive stance, could support AUD/USD in the coming months
Gold	Hold $US1800-/oz- $US2200/oz	Geopolitical tensions and political uncertainty, especially with a tight U.S. presidential election looming, are likely to keep gold attractive as a haven. These factors may result in gold prices stabilising within a relatively narrow range for the rest of the year.
Commodities	BUY   OIL HOLD .	We are constructive on commodities as key markets such as oil and copper remain finely balanced and are supported by limited inventories, producer discipline and/or supply shortfalls, with demand potentially benefitting from a China recovery or stimulus.
Property	BUY .	Office REITs offer attractive discounts to NTA. Falls in occupancy rates have stabilised and net operating income has picked up. Retail REITs are fairly priced, occupancy rates strong and net operating income has accelerated. Industrial REIT Goodman Groups forward PE is trading at the upper bound of its historical average. It could be vulnerable to a correction if double digit earnings if growth is not maintained.
Australian Equities	Accumulate	Valuations are more attractive relative to the US and broader global equities. Australian equity price to 12 months forward earnings trading near its historical average. We favour exposures to defensive sectors, such as health care, staples, utilities, and technology.
Bonds	Begin to increase duration. 3-5 yrs .	As interest rates stand at or near peak for most economies and inflation is likely to decline, albeit gradually and with volatility, some central banks are likely to start cutting interest rates, a process which has already started already in parts of the developing world.
Cash Rates	RBA to hold rates at 4.35%	Cash has appeal as a means of diversification and as a complement to the potential attractions of fixed income markets, and we maintain a moderately constructive view currently.

 

Global Markets
America	Underweight	The sudden weakness in the US labour market (4.3% unemployment). The market has, on the one hand, once again priced in more future interest rate cuts by the US Federal Reserve. We look for a U.S. mild recession to begin in 2024.
Europe     UK	Start Buying     Accumulate	The surprise French elections caused material underperformance in French equities and bonds. We are likely to see ongoing volatility in European assets while this plays out. Prime Minister Keir Starmer’s new government, prioritises economic growth, especially through reforms aimed at improving productivity.
Japan	Accumulate	The economic stimulus package being compiled by the government and the ruling Liberal Democratic Party this year may be large-scale to address the uncertain economic outlook.
Emerging markets	Start Buying	While individual risks remain due to the diverse nature of emerging markets, structural changes in global value chains and domestic economies are likely to support overall growth in 2025.
China	BUY	China will place a greater emphasis on “promoting consumption,” particularly in sectors like education, elderly care, childcare, housekeeping, tourism, and sports, to sustain growth if the export sector falters.