What Brexit? Global equities rallied in July led by international markets (Japan, emerging markets) while safe-haven assets such as high dividend yield, low volatility, and sovereign debt lagged.


Data Source: Bloomberg
 
Highlights

  • What Brexit? Global equities rallied in July led by international markets (Japan, emerging markets) while safe-haven assets such as high dividend yield, low volatility, and sovereign debt lagged.
  • Expectations of a large stimulus package (fiscal, monetary) in Japan following strong upper house election results for the incumbent Liberal Democratic Party helped propel a Japan rally along with a weakening in the yen although this reversed towards the end of the month when top officials downplayed any major package.
  • The notable exception to the risk-on rally was commodities which dropped ~10% driven by a decline in oil prices from $48.33/barrel to $41.60/barrel. Indeed, the bifurcated market we spoke about in the 2Q2016 commentary reversed itself once again as last month’s leaders ended up this month’s laggards.
  • The month-to-month reversal can also be seen at the U.S. sector level. Last quarter’s sector winners (energy, telecom, utilities, staples) lagged in July while technology, materials, health care and consumer discretionary led.
  • ‘Quality’ which lagged in the second quarter outperformed all other factors while ‘Low Volatility’ and ‘Momentum’ lagged.
  • Markets have largely settled down heading into August with implied measures of volatility (i.e. the VIX) trading at historically low levels suggesting widespread complacency. Investors may be bracing for another August/September surprise, but the markets may just continue climbing that wall of worry.

 

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