Explore the monthly market wrap-up, a summary of the key trends, emerging players and market movements.

Key market movements that caught our attention in July:

The rise of the Japanese Yen and the fall of the Nikkei

The correlation between the Japanese Nikkei 225 and the Yen is evident in the chart below. This negative correlation arises for a couple of reasons. Firstly, yen depreciation benefits exports and corporate profits, potentially driving stock prices up. Secondly, Japan's extremely low interest rates compared to the US make the yen an attractive option for carry trade.

Nikkei 225 (Blue) v USDJPY (Red)

Source: TradingView

Recently, after sitting at 38-year lows below 160 per dollar for much of July, the yen staged a sharp rally in the days leading up to and following the Bank of Japan's decision on Wednesday to raise interest rates. The first sign of improvement in the yen came after soft US CPI data on July 11. The US dollar sell-off opened the door for yen buying by Japanese authorities. Over the two days from July 11, Japanese authorities spent US$36.8 billion intervening in the foreign exchange market. Importantly, the yen's strength has continued. With rising expectations for a rate cut in the US in September and the ongoing BOJ tightening cycle, the yen is likely to gain further momentum.

During the same period, the Nikkei 225 has fallen by 7.39%. This decline in Japanese stocks is largely due to the strengthening yen and a global sell-off of technology stocks. The stronger yen negatively impacts exporters' profits and revenue generated from tourism, which had spiked due to the previously weak yen. Looking ahead to August, neither the US Fed nor the BOJ is scheduled to decide on rate movements. It will be interesting to see how both the yen and the Nikkei 225 perform from here.

Rex and its battles

On Monday, Australian airline Rex suspended the trading of its shares, pending an important announcement. This was followed by confirmation that Rex had entered voluntary administration. Earlier in the year, the small airline Bonza also fell into voluntary administration, leaving Rex to contend alone against the industry giants, Qantas and Virgin.

In 2021, Rex ventured into the highly concentrated yet lucrative market of direct flights between Sydney and Melbourne. This strategic decision initiated a series of challenges that have culminated in the airline's recent collapse. To service these routes, Rex leased nine Boeing 737s. However, the rapid rise in local interest rates throughout 2022 made these leases increasingly difficult to maintain. Competing against industry giants Qantas and Virgin, which together control approximately 90% of Australia's airline market, Rex ultimately could not sustain the financial pressure, leading to its entry into administration.

Rex B737 in flight

Source: Point Hacks

The impact on regional flyers, who heavily rely on Rex's services, remains uncertain. Notably, the issues stemming from the intercity flights have not directly affected Rex's regional operations. The airline continues to operate flights using Saab 340 planes to destinations classified as "regional." However, the future of these services is unclear. Prior to the pandemic and the expansion into major city routes, Rex was operating profitably. It is clear that the regional branch of the business is commercially viable. If financial support becomes available, prioritising regional flights is essential. Without this focus, numerous regional communities are likely to suffer significant setbacks. 

Having flown with Rex numerous times from Orange to Sydney, I can't fault their service and reliability. It is a shame to see the airline face such a challenging future.

Stock market rotation - large cap to small cap

A notable rotation from large-cap to small-cap shares, driven by rising expectations of a global rate-cutting cycle, has driven the Russell 2000 Index to levels not seen in months. The Russell 2000, a small-cap U.S. stock market index, comprises the smallest 2,000 stocks in the broader Russell Index.

The primary driver behind the Russell 2000's recent outperformance is the expectation of rate cuts. Lower interest rates typically benefit cyclical small-cap companies more significantly, as these companies are often more sensitive to changes in borrowing costs and economic conditions.

Large-cap shares have faced increasing valuation pressures, prompting investors to seek better value in the small-cap segment, which offers cheaper price tags and higher growth potential. As expectations for rate cuts intensified throughout July, this rotation became evident.

Looking ahead, the rotation is expected to persist as the Federal Reserve embarks on a rate-cutting cycle. However, the overall economic health remains a crucial factor, which could pose challenges for the markets despite the anticipated monetary easing.

Nasdaq Composite (Blue) v Russell 2000 Index (Orange)

Source: TradingView

Will's May market comments:

"July marked a significant shift in U.S. rate expectations, while Australian expectations moved in the opposite direction. However, on the last day of the month, CPI data suggested that inflation pressures were easing in Australia, reducing the likelihood of a rate hike by the RBA. It is too early to draw conclusions about the RBA's actions, as this one data point needs to be supported by upcoming data. Conversely, U.S. data has consistently shown progress in controlling inflation, leading to rate cuts being fully anticipated for September."

- William Smith, Dealers Assistant, BPC Wealth Management