July 2024 market commentary

July saw markets respond to clearer signals from central banks and some notable economic and political developments. With better-than-expected Q2 growth data and an assumed Labour victory in the general election reducing potential volatility, the FTSE 100 ended the month up 2.53%. The S&P 500 eventually gained 1.2% after a volatile month in the US tech sector which saw a major sell-off followed by a late rebound. Mixed economic data in the eurozone coupled with regional uncertainty about the election results in France contributed to the Euro STOXX 50 falling 0.29%. Oil contributed to a drop in global commodity prices on the back of supply concerns in the Middle East and weaker demand from China.

(All returns are sourced from FactSet and are reported as total return in local currency for the period 01/07/2024 — 31/07/2024)

July market summary

After the Federal Reserve voted to hold its benchmark interest rate at 5.25%-5.5% for the eighth consecutive meeting, chairman Jerome Powell announced at a post-meeting press conference that a rate cut could be made as early as September. Speaking at the Economic Club in Washington earlier in the month, Powell stated that the central bank would no longer wait for inflation to reach the 2% benchmark before cutting rates. 

Powell's comments throughout July led markets to price in a higher likelihood of three rate cuts during 2024. US investors responded to the clearest signal yet of a change in monetary policy by flocking to interest rate-sensitive small-cap stocks, leading to significant growth in the Russell 2000 and S&P Small Cap 600 indices.

The Bank of England voted by a slim majority to cut its base interest rate to 5% - its first cut since March 2020. Governor Andrew Bailey noted that inflationary pressures had eased enough to warrant the cut but warned against expectations of a continuing fall in borrowing costs. While inflation hit the Bank’s 2% benchmark in May and held in June, core inflation remains comparatively high and a spike is anticipated later in the year as energy consumption and costs rise. There is also some concern that planned public sector pay rises could affect inflation through wage growth and jeopardise future rate cuts.

The Bank also raised its forecast for domestic growth in 2024 from 0.5% to 1.25%, though this reflected better-than-expected economic performance during the first half of the year and didn’t result in revised growth forecasts for 2025 and 2026.

There is also some concern that planned public sector pay rises could affect inflation through wage growth and jeopardise future rate cuts.

Having cut its base rate in June, the European Central Bank (ECB) held its ground in July after a spike in inflation exceeded economists’ forecasts. The increase was driven by rising energy prices and sticky inflation in the services sector. While regional economic growth exceeded expectations during the first half of the year, Germany’s economy – the eurozone’s largest – contracted by 0.1% in Q2, reversing its early-year gains and defying growth forecasts. 

Despite the inflation spike and mixed economic signals in Europe, analysts still expect the ECB to announce a rate cut in September.

UK government scraps planning tests that restricted development of onshore wind farms

In order to ease historic planning restrictions for onshore wind farms and support plans to double domestic onshore wind generation capacity by 2030, the Department for Energy Security and Net Zero (DESNZ) scrapped planning tests put in place by the last Conservative government. 

A de facto ban on onshore development had existed since 2015 after then-prime minister David Cameron responded to concerns raised by Conservative MPs and party members about the impacts of turbines on rural communities and landscapes. Consequently, only 16 new turbines were granted planning permission in England between 2016 and 2020. Requirements to secure “proved community support” for projects not included in local development plans have now been removed.  

These changes are part of a broader plan to boost domestic energy security and fully decarbonise the UK electricity grid by 2030. To facilitate this, the government announced the formation of the Onshore Wind Industry Taskforce, jointly chaired by energy secretary Ed Miliband and Matthieu Hue, CEO of EDF Renewables. The Taskforce brings together government, industry, regulatory, and financial bodies to overcome development barriers, ensure environmental sustainability, maximise benefits, and commit to collective action.

These changes are part of a broader plan to boost domestic energy security and fully decarbonise the UK electricity grid by 2030.

US companies stand firm on diversity, equity and inclusion (DEI) commitments despite political backlash

Pressure from US conservatives and anti-ESG asset managers saw 60 companies drop ESG incentives from their executive pay plans with several also removing diversity criteria from board-level bonus schemes. DEI has faced heavy criticism from Republicans and their supporters: Florida governor Ron DeSantis labelled it “division, exclusion and indoctrination”, while some commentators sought to blame diversity and inclusion policies for alleged security failings during the recent assassination attempt on Donald Trump.

While the backlash has worried some US business leaders, most companies remain focused on their DEI commitments. A recent survey of 125 companies by the Association of Corporate Citizenship Professionals found “unwavering” commitment to DEI, though it noted that legal and compliance oversight was increasing, and that the language of DEI was evolving. In another executive survey by Bridge Partners, almost 75% of respondents expected their DEI programs to expand in the next two years while only 4% said they would reduce or eliminate them. Respondents cited significant benefits to recruitment, retention, and wider reputation in prioritising DEI. Most also observed that political opposition to DEI had made little or no impact on their strategic thinking. 

Government targets job guarantees as Tata Steel shifts towards greener UK production

With Tata Steel planning to replace its blast furnaces in Port Talbot with cleaner alternatives, the government is working to ensure that job guarantees are included in any negotiations for state financial support. The electric arc furnaces Tata are looking to build are less carbon intensive but require fewer workers to operate.

The previous Conservative government agreed £500 million in taxpayer support to complement Tata’s proposed £750 million investment in new furnace technology. However, the agreement wasn’t signed before July’s general election, increasing uncertainty about the future of up to 2,800 jobs. New trade secretary Jonathan Reynolds has prioritised job preservation in his dealings with Tata but has so far been unable to confirm how many at-risk jobs the government could guarantee. Reynolds nevertheless stated that more government money is available to support the steel industry and that any transition plan “works for working people”.

The support for Tata forms part of a £3 billion government pledge to clean up the UK steel industry. British Steel, who operate the country’s other two blast furnaces, has also applied for taxpayer support to accelerate its own transition to greener production. 

The electric arc furnaces Tata are looking to build are less carbon intensive but require fewer workers to operate.