After a difficult few months risk assets generally performed well, with most equity and credit markets producing positive returns. The MSCI World advanced 3.1% in July, with Continental European equities producing the strongest returns of 4.1%, closely followed by the US up 3.7%. Emerging markets were up 2.2%, recovering some ground from the losses experienced in June. Developed markets continue to outperform emerging markets; with the flat Asian market returns partly explaining this underperformance by emerging markets.

The current risk-on environment has resulted in US Treasuries falling 0.5% in July, and notably falling 1.6% year-to-date. In July, the 2-year US Treasury yield rose 14 basis points to 2.67% and 10-year US Treasury yields rose 10 basis points to 2.96%.

It was a flat month for developed equities and safe-haven government bonds, with the MSCI World index and US Treasuries returning zero in June. Notably, the market action came in emerging markets; where the MSCI Global Emerging Market equities declined 4.2%, EM bond yields fell by 1% and EM currencies came under pressure. Emerging market currencies vulnerable to a strong dollar and rising interest rates were put under considerable pressure. The Shanghai market fell by 8% in June, taking its fall from the peak in January into bear market territory, down over 20%.

Underlying these moves in the emerging market asset classes was a more hawkish tone from the Federal Reserve and escalating trade tensions. The Federal Reserve hiked rates by 0.25% in June which was widely expected by the market, following strong macroeconomic data. However, the Federal Reserve changed their forward guidance to include two additional rate rises in 2018 and then another three next year. If implemented this would take rates up from the current 2.0% to 3.25%, this would be the first time for a decade that US dollar cash would offer a positive real return.