CONTRIBUTORS
Michael Hasenstab, Ph.D.
Portfolio Manager, Chief Investment Officer, Templeton Global Macro®
Calvin Ho, Ph.D.
Portfolio Manager, Director of Research, Templeton Global Macro
Key takeaways
July overview: Renewed fighting in the Middle East during July resulted in financial markets giving back some of their June gains, and oil prices rose again. The US dollar (USD) weakened on aggregate over July, with most of the decline coming in the latter days of the month; it depreciated against most developed market currencies but showed mixed performance against emerging markets (EM). Sovereign bond yields trended higher across both developed and emerging markets, while hard-currency EM bond indexes were weaker in aggregate over the month. Inflation remains at relatively high levels across a number of countries, but some have seen price momentum slowing more recently. Major central banks left rates on hold during July, but still mostly indicated some hawkishness in the outlooks. US growth data for the second quarter (Q2) was below market expectations, while that in the euro area (EA) was still weak but improved compared to prior outcomes.
Outlook: In its July World Economic Outlook (WEO), the International Monetary Fund (IMF) left its global growth forecasts broadly unchanged, noting an uneven outlook as the war shock weighs on energy importers and vulnerable economies while artificial intelligence (AI)-driven demand is lifting those countries integrated into the global technology value chain. We highlight that the latter group includes a number of EMs, particularly in Asia. Among EMs, we highlight that while resilience remains a notable broad factor, differing sensitivities and policy around the current geopolitically fragile situation requires careful country-by-country analysis. Uncertainty about the path of monetary policy remains high, with various central banks pointing to growth and inflation risks stemming from the Iran conflict, though it appears that most countries are now in or heading towards a hiking cycle (with some idiosyncratic exceptions). Despite the current geopolitical backdrop, recent developments appear to confirm our thesis of “global rewiring,” and we expect global relations to continue shifting and realigning for some time yet.
This month’s Global Macro Insights offers a comprehensive update on regional developments, along with analysis of the key opportunities and challenges shaping the current macroeconomic landscape.
WHAT ARE THE RISKS?
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Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
Currency management strategies could result in losses if currencies do not perform as expected.
Active management does not ensure gains or protect against market declines.
Diversification does not guarantee a profit or protect against a loss.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
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