5th February 2024
Markets last week
The previous two weeks have been dominated by central bank meetings with the US Federal Reserve (Fed) and the Bank of England(BoE) last week following the Bank of Japan and the European Central Bank the week before. Equity analysts have been busy this last fortnight too as reporting season is well underway. A third of companies have reported in the US with 75% beating earnings expectations. This is slightly higher than the historic average. Corporate profits have been 4% higher than analysts anticipated at the start of 2024. Equity market performance was mixed last week as the US and Japanese equities performed well whilst UK equities declined.
Six of the ‘magnificent seven’ stocks that drove the equity market return last year reported during the week. The’ magnificent seven’ are producing the majority of the growth. The US equity market is projected to achieve a year-on-year earnings increase of 1.6% for the fourth quarter however, excluding the ‘magnificent seven’, earnings would be down over 8% and profits would be down 6%. Although other companies have surpassed earnings expectations their outperformance hasn't been enough to shift forecast growth rates higher and equity market performance continues to be driven by a small number of large cap stocks (although some of the leaders have changed).
Last year the strong performance of the ‘magnificent seven’ was driven to a large extent by excitement surrounding the potential of artificial intelligence. Investors are now scrutinising the individual prospects of each of these companies rather than treating them as a collective trade. This has led to a greater dispersion in returns of the ‘magnificent seven’; while four of the tech giants continue to outperform the broader market, two have become the primary drag on the index.
Interest rates
The Fed made no changes to their interest rate policy at 5.5%. Investors weren’t expecting any change in the policy rate but were looking for guidance from Fed Chair Jerome Powell in terms of when the first cut might happen and what the committee members might be looking for. Powell pointed to the annual revisions to the Consumer Price Index (CPI) inflation numbers which will be released on Friday 9 February. The market seemed overoptimistic at the start of the year on how quickly the first cut would come. Futures were pricing in almost an 80% probability of a cut by March. At the start of last week the probability had dropped to less than 50%. By the end of the week the probability had collapsed to 20% following this statement by Powell “I don't think it is likely that the committee will reach a level of confidence by the time of the March meeting to identify March as the time to begin cutting, but that is to be seen”. Particularly strong non-farm payrolls data on Friday also makes a March cut seem unlikely. Amongst this data US bond yields were relatively volatile falling to an intraweek low of 3.84% before rising on the back of the labour data on Friday to close the week at 4.06%, not far off from where they started the week. Corporate bonds performed well benefiting as credit spreads tightened.
The BoE’s Monetary Policy Committee (MPC) opted to keep the bank rate steady at 5.25% in its meeting on Thursday. Despite a split vote, with some members advocating for a rate rise and others for a cut, the MPC adjusted its near-term inflation forecast downward, reflecting the recent inflation trend. Governor Andrew Bailey indicated a potential rate cut, whilst emphasising the uncertainty around the timing. He also acknowledged risks from geopolitical factors. Overall the MPC sees more balanced domestic price and wage pressures which points to the possibility of rate cuts later this year. Gilt yields were relatively unchanged on the week but have been rising more than US yields so far this year. The UK 10-year yield is currently hovering below 4% whilst the US 10-year yield is above 4%.
The Week ahead
Wednesday: German industrial production
Our thoughts: December's German production data is crucial for assessing the country's industry health as it has so far only narrowly avoided recession. Germany’s Gross Domestic Product (GDP) contraction in the fourth quarter is attributed predominantly to industrial weakness. The expectation is for continued subdued industrial activity in the coming months.
Thursday: China inflation data
Our thoughts: The ongoing deflationary trend in China characterises the challenges it currently faces from weak demand, rock bottom sentiment and a decelerating global economy. The troubles continuing within China’s real estate sector exacerbates the situation. While the recent stimulus from the People's Bank of China may have helped China’s troubles continue. Both CPI and Producer Price Index (PPI) are expected to remain in deflationary territory in January.
Friday: CPI revisions
Our thoughts: Every year economists working on the CPI adjust the inflation calculations for the last five years through the seasonal adjustment assumptions. Following this five-year adjustment period the data is deemed final. This will be important for the Fed, as Jerome Powell said himself during the Fed press conference last week, as any more significant adjustments could change the Fed’s assessment of the current disinflation and the timing of the first rate cut.
Markets for the week
In Local Currency In Sterling
Index | Last Week | YTD | Last Week | YTD |
UK | ||||
FTSE100 | -0.3% | -1.5% | -0.3% | -1.5% |
FTSE250 | -0.9% | -2.6% | -0.9% | -2.6% |
FTSE All-share | -0.4% | -1.7% | -0.4% | -1.7% |
US | ||||
US equities | 1.4% | 4.0% | 2.1% | 5.1% |
Europe | ||||
European Equities | 0.4% | 2.9% | 0.4% | 1.5% |
Asia | ||||
Japanese Equities | 1.7% | 7.3% | 2.1% | 2.9% |
Hong Kong Equities | -2.6% | -8.9% | -2.0% | -8.0% |
Emerging Markets | ||||
Emerging Market Equities | 0.3% | -3.5% | 1.1% | -2.4% |
Government Bond Yields* | Current Level | Last Week | YTD | |
10-year Gilts | 3.92% | -54 | 38 | |
10-year US Treasury | 4.02% | -12 | 14 | |
10-Year German Bund | 2.24% | -6 | 22 | |
*Yield change in basis points | ||||
Currencies | Current level | Last week | YTD | |
Sterling/USD | 1.2631 | -0.6% | -0.8% | |
Sterling/EUR | 1.1709 | 0.1% | 1.5% | |
Euro/USD | 1.0788 | -0.6% | -2.3% | |
Japanese Yen/USD | 148.38 | -0.2% | -4.9% | |
Commodities (in USD) | Current level | Last week | YTD | |
Brent oil (bbl) | 77.33 | -7.4% | 0.4% | |
WTI oil (bbl) | 72.28 | 0.1% | 1.5% | |
Copper (metric tonne) | 8482 | -0.7% | -0.9% | |
Gold (oz) | 2039.76 | 1.1% | -1.1% |
Sources: FTSE, Canaccord Genuity Wealth Management
Your weekly market review was powered by Canaccord Genuity Wealth Management (CGWM)
Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. Where investment is made in currencies other than the investor’s base currency, the value of those investments, and any income from them, will be affected by movements in exchange rates. This effect may be unfavourable as well as favourable. Past performance and future forecasts figures are not a reliable indicator of future results.
