From a sector standpoint, Telecoms were the best performers as positive earnings results from Verizon and AT&T helped propel the sector by +6.36% on the month. Technology stocks continued to rally in July, up +4.33% on the month, even amidst mixed results from Alphabet and a weak outlook from Facebook. The sector’s top weight, Apple, is set to report results after the market close today. Other notable sector performances came from Industrials, which were up only +0.06% on the month, amidst weak earnings from GE, the largest weight in the sector.

International Equity

Major International equity indices posted yet another strong month of gains, helped by strong earnings, economic growth, and a weaker U.S. Dollar.

Emerging Markets equities, as measured by the MSCI EM Index, rose +6.04% in July, and have gained an eye-opening +25.74% YTD. Developed Market equities continue to post strong gains, with the benchmark MSCI EAFE Index gaining +2.90% in July, and a not-tooshabby +17.53% YTD. As we’ve noted in previous months, the weaker U.S. Dollar relative to major world currencies (i.e. Euro, Yen, EM currencies) has positively contributed to the total returns of U.S. investors investing abroad in U.S. Dollars. This comes from the dual return components (asset price return + currency return) that have both been favorable year to date.

However, stronger foreign currencies (i.e. a stronger Euro) could become a headwind for Eurozone companies, especially those that are export oriented. For example, the MSCI EMU Index returned +0.36% in July in Euro terms, but a more meaningful +3.86% in USD terms, thanks to the strength of the Euro relative to the U.S. Dollar (+3.50%) during the month. As the Euro continues to appreciate, it increasingly could become the Achilles heel of a rebounding Eurozone, especially given the expectation for the European Central Bank (ECB) to begin tapering its bond buying program in coming months.

International sector returns were largely positive in July, with 10 of 11 sectors posting positive returns. Cyclical, value oriented sectors such as Materials, Technology, Energy, and Financials led the way, posting returns of +6.93%, +5.76%, +5.58%, and +5.27%, respectively. As a result, Value stocks, as measured by the MSCI EAFE Value Index returned +3.37%, while their Growth counterparts, as measured by the MSCI EAFE Growth Index returned +2.42%.

On a year to date basis, Technology continues to be a standout sector, thanks to the international version of the FAANG (Facebook, Amazon, Apple, Netflix, Google) trade, notably dubbed SATT: Samsung, Alibaba, Tencent, Taiwan Semiconductor, which has helped propel both Tech and EM indices to multi-year highs. Samsung notably reported record profits, while Alibaba and Tencent are due to report earnings in the coming weeks.

Fixed Income

Fixed Income returns were largely positive in July, as the Federal Reserve did not make any adjustments to monetary policy. The ML U.S. Broad Market Index returned +0.42% on the month, largely driven by performance of corporate bonds relative to Treasuries. The ML Corporate Master Index and ML U.S. Treasury/Agency Master Index returned +0.75% and +0.16%, respectively. Interestingly, municipal bonds caught a bid in July, with both the ML Municipal Master Index and ML Municipal High Yield Index posting strong returns of +0.73% and +0.72%, respectively. One likely catalyst for strong municipal returns is the failure of comprehensive tax reform thus far in Washington. With hopes fading for a massive tax overhaul, municipals may be regaining some of their lost luster, and making up for relative underperformance along the way.

High Yield spreads (OAS), as measured by the ML High Yield Master II Index, continued to tighten in July, with spreads compressing from 377bps to 361bps, leading the index to return +1.15% during the period. It should be pointed out that high yield spreads are nearing their tightest level in more than a decade. The only recent timeframe during that period where spreads were tighter was in June 2014 right before oil collapsed from $110/barrel. The current high yield Option Adjusted Spread (OAS) of 361 bps is decisively below its 5-, 10-, and 15-year averages of 491bps, 638 bps and 577 bps, respectively. High yield has been the best performing fixed income sector over the past year, returning +11.24%.

Strong performance from Emerging Markets debt, as measured by the ML USD Emerging Market Sovereign & Credit Index, continued in July, with the index returning +0.71%. Perhaps more impressively, EM USD debt has returned +8.88% over the past year.

Looking ahead to the Fall, expectations for the next Fed rate hike are falling. According to Fed funds futures compiled by Bloomberg, the expectation for a rate hike in September stand at 5.6%, and December 41.8%, down from 16.0% and 51.6% at the end of June. September will be a big month for global central banks, with the Federal Reserve, European Central Bank, and Bank of Japan all meeting within a two-week time frame. Stay tuned.

Alternative Investments

Alternative investments largely posted positive returns during the month, led by a sharp rebound in West Texas Intermediate (WTI) crude oil. WTI prices rose +9.0% during the month to close at $50/bbl, the highest monthly close since March. The rebound in crude helped propel the Bloomberg Commodities Index higher by +2.2% in July; however, the gains in crude should not overshadow the gains in other commodity sectors such as corn and wheat that have also contributed to performance. Real Estate, as measured by the FTSE NAREIT All REIT Index, rose +1.05%, hitting a 5-month high.

Currencies were the standout alternative investments in July, with the U.S. Dollar, as measured by the DXY Index, dropping -2.9%, bringing its decline to -9.1%. The precipitous decline in the Dollar has largely stemmed from weaker than expected U.S. economic data and the failure of Washington to enact any meaningful reforms. The Dollar has ostensibly become a proxy for Washington’s dysfunction, with sharp movements in the Dollar index reflecting the latest breaking news. The Dollar’s drop has benefitted the Euro most significantly, with the Euro strengthening by +12.6% versus the Dollar YTD. At a recent $1.18 USD/EUR the Euro is at its highest level against the Dollar in more than 2 years. Moreover, at its current level, a strong Euro is likely to become problematic for European companies and export driven economies as their goods and services are now more expensive. One other notable currency move was the strength in the Canadian Loonie, stemming from the Bank of Canada’s decision to raise interest rates in July and better than expected economic data. The Loonie strengthened from $1.30 CAD/USD to $1.25 CAD/USD during the month, and is now nearly +9% stronger than just three months ago when the Loonie was trading at $1.37 CAD/USD.

Lastly, volatility dropped -8% in July, with the CBOE’s VIX Index touching a low of 9.36 on July 21st, the second lowest reading ever. The low levels of volatility seen in the market are contributing to a sense of complacency that has seen equity markets simply grind higher. Those low levels of volatility have not benefitted Hedge Funds, which continue to underperform the broader market over multiple time horizons. Nine out of ten strategies were positive in July, led by Equity Hedge strategies, which were up +0.98%. Merger Arbitrage strategies, which typically benefit from both higher interest rates and merger activity were the worst performing strategy, returning -0.10%.

This article was written by Nottingham Advisors, a participant in the ETF Strategist Channel.