During July, global equity markets experienced a relief rally, as most global equity markets bounced from very oversold states. Fixed income markets continued to remain undecided about the future path of inflation and interest rates, while commodity markets oscillated between a slow-down of global growth, and a hope that global central banks will ease up on the current tightening cycle.
Central bank watch
Central Banks continued to take action to contain inflation by increasing interest rates. During July we saw the RBA and the RBNZ raise their official cash rates by 0.50%. Canada raised their overnight rate by 1.00%. The ECB increased their rate by 0.50% and the US Federal Reserve raised their rate by 0.75%.
FOMC meeting
On the 28th July, the FOMC met and decided to increase interest rates by 0.75%, the second increase of 0.75% in a row. Although this 0.75% increase was in line with the forecasted rate rise, the crucial information was contained within the FOMC press conference.
Chairman Powell stated that there is some evidence that the raising of interest rates is slowing down economic activity, however these interest rate increases can take some time to flow through. When asked about a recession, Powell, stated that the risk is doing too little versus doing too much (rate increases). He also stated that the path to a soft landing has narrowed, i.e. a global recession is probable vs possible.
Energy price increases
Everyone has heard about rising energy prices in Europe, but we are now seeing this here. Frame Funds received our office electricity bill during July…compared to the same period last year, it rose by 42%!
Portfolio performance
During July, both strategies rose as there was some respite to the selling pressure seen in previous months. Volatility and uncertainty remained high over the month. Both the long short Australian equity strategy and the global macro strategy rose by +1.27% and +0.595% respectively.
Top equity contributors for the Frame Long Short Australian Equity Fund (FLSAEF) were Domain Holdings Australia Ltd (ASX: DHG), National Australia Bank Ltd (ASX: NAB), and Aurizon Holdings Ltd (ASX: AZJ) which added +0.11%, +0.09%, and +0.07% respectively.
Largest detractors for the month were Orora Ltd (ASX: ORA) and Atlas Arteria Group (ASX: ALX), which cost -0.21% and -0.15% respectively.
For the Frame Futures Fund (FFF), Equity investments rose by +1.12%. Currency and Commodity investments declined by -0.47% and -0.05% respectively, and Fixed Income investments were flat.
Wrapping up
Recent communication from most Global Central Banks continues to reiterate that their primary objective is to maintain price stability, which they are currently not doing.
Most Central Banks have stated that they are monitoring to see if inflation dips after the recent rate increases, however, they have also stated that they will continue to take further action to get inflation under control, if inflation does not drop aggressively over the next 8 weeks.
We will continue to be patient and wait for momentum to return to equity markets before actively allocating again. However, our research team is actively working on further strategy development, to take advantage of this new world of expanded volatility.
If you would like to discuss any of these points, please email me at hue@framefunds.com.au or call our office on 02 8668 4877.
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