Market sentiment remained positive in July, supported by a decline in inflation in developed markets and resilient growth in the US, which led to a rally across most asset classes and regions. Global equities performed well, notably the higher risk sectors such as small cap stocks and Chinese equities.

Fixed income also recorded positive returns overall, with the encouraging inflation data in the UK supporting gilts, however, US Treasuries and European government bonds lost some ground as second-quarter GDP data was relatively strong. Commodity prices recovered some of their earlier losses this year and the price of oil rallied while European natural gas prices continued to fall as storage remains high.

The US Federal Reserve (Fed) raised its key policy rate by 0.25% in July to a range of 5.25%-5.50% in line with market expectations, retaining the view that further interest rate hikes may be appropriate, however markets appear to have priced in this latest rise as the peak in the current interest rate hiking cycle. While core inflation remains stickier, US headline inflation fell more than expected and along with a resilient economy, markets are expecting a ‘soft landing’. This provided support to US equities in July with the S&P 500 Index up 20% in US dollar terms for the year to date. The resilience of the US consumer has been one of the key drivers behind the strength of the US economy, partly due to the spending of excess liquidity gained during COVID. The Fed may have to hold interest rates at current levels for longer than investors were expecting given the robust economy.

Fitch recently became the second major rating agency after Standard & Poor’s to downgrade the US from its triple-A rating, which resulted in the dollar falling further across a range of currencies, however the broader impact is expected to be limited.

In Europe, falling inflation and weaker activity data led the European Central Bank (ECB) to raise interest rates in July by 0.25% to 3.75% and indicated the possibility of a pause in September, although not necessarily the end of the interest rate hiking cycle. European equities recorded gains in July supported by hopes for an ECB pause and positive GDP data. Within eurozone fixed interest, Italian bonds continue to be among the best performing and high yield bonds have continued to outperform investment grade credit over the course of this year.

In the UK, wage data remained elevated, however July saw positive news around inflation as it declined more than expected in June with headline CPI rising 7.9% year on year, down from 8.7% in May. As a result, the expectations are for the Base Rate to peak at around 5.75%, down from 6% previously anticipated. The UK FTSE All Share Index posted a positive return in July yet underperformed global developed market equities, likely due to the weak UK growth outlook and prospect of further monetary policy tightening. However, the sterling strengthened as a result of the expectation of additional interest rate hikes from the Bank of England compared to other developed market central banks.

Japanese equities gained less than other developed market peers in July yet remains the top performing equity market for the year to date. Japanese inflation remained strong, the Bank of Japan loosened its yield curve control framework and the yen rallied. In China, growth continued to slow in the second quarter and sentiment has been weak for most of the year as a result of the slower than expected, post-pandemic economic recovery and renewed US-China tensions, however Chinese equities rallied in July, supported by the strength of the local currency, policy easing and hopes for further stimulus.

Markets proved buoyant in July and investor sentiment has improved this year, highlighting that inflation can fall without a meaningful decline in economic activity or significant further interest rate hikes. Sentiment could be tested as the economic impacts of rising interest rates become more apparent and the risks include weaker corporate earnings or economic data as well as further interest rate rises which are likely in the near term in the UK, US and Europe.


Market Performance 2023 Year to Date
FTSE All-Share +5.29%
FTSE World ex-UK +11.55%
FTSE Actuaries UK Conventional Gilts All Stocks -2.75%
FTSE Actuaries UK Index-Linked All Stocks -3.05%


 Total returns in GBP to 31/07/2023


Key Rates  
Bank of England Base Rate 5.25%
Inflation (Retail Price Index/Consumer Price Index)* 10.70%/7.90%


 *June 2023

Source of data: FE Analytics,,

The content contained in this article represents the opinions of MacIntosh & James Partners Ltd. The commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.