17th June 2024
Summary
Overall the week was marked by cautious trading across global markets
The US Federal Reserve (Fed) held rates steady at 5.00% to 5.25% and signalled just one interest rate cut for 2024
US core Consumer Price Index (CPI) was +0.2% in May, softer than +0.3% expected, and year-on-year core CPI was +3.4% versus +3.5% expected
US Producer Price Index (PPI) was also softer than expected ─ monthly headline PPI fell by -0.2% versus +0.1% consensus view, which left the year-on-year number at +2.2% versus +2.5% expected
The US equity market reached another new all-time high, supported by strong performance from the technology sector
Risk-off sentiment in Europe, driven by French political uncertainty, led to increased volatility and a flight to safety in bond markets
The interest rate spread between the French 10-year government bond yield and the German 10-year government bond yield widened by 0.32% over the week and is at its widest level since the eurozone debt crisis
Eurozone equities had their worst week since the one that saw the collapse of Credit Suisse in March 2023
The FTSE All Share index experienced its fourth consecutive week of declines
The Bank of Japan (BoJ) decided to maintain its ultra-loose monetary policy, keeping the short-term interest rate at -0.1% and the 10-year government bond yield target around 0%.
The week ahead
Several Fed governors will be speaking following the Federal Open Market Committee (FOMC) meeting last week
Tuesday we will see the release of US retail sales data for May, with the consensus view being a 0.2% month-on-month rise
On Wednesday, the UK inflation data for May is released with an expected a year-on-year growth rate of 2.0%
Thursday will see the Bank of England (BoE) make a decision on interest rates ─ the expectation is that the BoE will keep rates at 5.25%
Finally, on Friday we will learn UK retail sales growth for May with an expectation of month-on-month growth of 1.6%.
Markets last week
Market environment
Overall the week was marked by cautious trading across global markets. The Fed’s decision to hold rates steady, coupled with ongoing geopolitical tensions in Europe and the BoJ's dovish stance, created a mixed picture for investors. The risk-off sentiment in Europe, driven by French political uncertainty, was a significant factor, leading to increased volatility and a flight to safety in bond markets.
Despite this backdrop it was a positive week for asset prices as global bonds and equities made moderate progress. The global equity market, driven by US technology companies, delivered a return of 0.8% (sterling, unhedged) whilst global bonds returned 0.9% (sterling, hedged).
US
US markets continued to outperform with the Fed’s policy meeting dominating market sentiment. On 13 June the Fed's FOMC decided to maintain the federal funds rate at 5.00%-5.25%, as widely anticipated. This decision was influenced by the mixed signals in the economic data. Investors were becoming more confident about rate cuts as first there were the weekly initial jobless claims, which came in at 242k versus 225k expected in the week ending 8 June. Coupled with the rise in the unemployment rate last week, it added to signs that the labour market might be showing signs of weakness. Alongside that, the PPI release for May was also softer than expected, which cemented the theme from the CPI the previous day. Despite the market’s expectations for two rate cuts in 2024, the Fed adjusted its dot-plot to reflect one rate cut for this year. With the risk-off environment in Europe, interest rates in the US fell over the week and the US Dollar strengthened.
The S&P 500 returned +1.6% for the week in local currency terms. This was driven by a small number of technology companies, NVIDIA, Apple, Broadcom and Microsoft, contributing circa 1.7% after an upbeat Artificial Intelligence driven outlook from chip supplier Broadcom. Broadcom shares rallied 23% over the week and NVIDIA continues its strong run with a 9% gain. The equity gains were very narrow with the equal-weighted S&P 500 down -0.5%, whilst the small-cap Russell 2000 was down -1.0%.
UK
The BoE is expected to maintain its current interest rates next week; however, the market anticipates a rate cut in August or September. Recent data indicates that the UK economy stagnated in April, aligning with forecasts, but industrial production and construction output fell more than expected. Labour data reveals that while wage growth remains high, the unemployment rate unexpectedly increased to 4.4%, the highest since September 2021.
The FTSE All Share index experienced its fourth consecutive week of declines, driven by uncertainties surrounding interest rates and political instability in Europe. French President Emmanuel Macron’s decision to call snap elections and a more hawkish outlook from the Fed also contributed to market struggles. Additionally, the UK 10-year gilt yield declined over the week, reaching a four-week low.
With the UK election just three weeks away, both major parties have released their manifestos. Labour continues to lead in opinion polls by around 20 percentage points. The Reform party, led by Nigel Farage, is polling well, splitting the Conservative vote and further benefiting Labour.
Europe
In Europe, markets experienced heightened volatility, largely driven by political uncertainty in France and ongoing economic challenges. The French political landscape was in turmoil after President Emmanuel Macron called a snap election for July 2024. This political instability fuelled risk-off sentiment across European markets.
The Euro Stoxx 50 index and major bourses in France, Germany, and Italy witnessed declines. The CAC 40 in Paris, heavily influenced by French political developments, fell 6%, exacerbating the risk-off mood. Additionally, concerns over economic growth in the eurozone, compounded by lacklustre manufacturing data, further dampened investor confidence.
Currency markets also felt the strain, with the euro weakening against the US dollar. Bond yields in the eurozone broadly edged lower, mirroring the safe-haven demand for German bunds. France-German 10-year spread rose by 32 basis points over the week, the biggest weekly jump in the spread since the height of the sovereign debt crisis in 2011.
Japan
The BoJ held its policy meeting on 14 June and decided to maintain its ultra-loose monetary policy, keeping the short-term interest rate at -0.1% and the 10-year government bond yield target around 0%. Policymakers voted to continue their current asset purchases until the July meeting, despite Governor Ueda’s earlier indications that a reduction in the bond buying programmes may be due. The central bank will come with a plan for reducing its bond purchases over the coming one to two years at their next meeting.
Equities in Japan were broadly flat over the week and the yen weakened against the dollar, reflecting the disparity in monetary policy between the BoJ and other major central banks.
Emerging markets
Overall, emerging market equities navigated a complex landscape, balancing economic recovery signals with regional political and economic challenges. The broad market equity index saw a modest return amid varying regional performances.
The Week ahead
Thursday: ECB rate decision
Our thoughts: The ECB is highly likely to cut rates by 0.25% this week with the swap market pricing in a probability of 95%. Although the most recent inflation data was a marginal disappointment, eurozone price growth has moderated significantly from the peak in 2022. Members of the Governing Council have outlined that some noise in the underlying inflation data is to be expected with policy easing appropriate irrespective of such noise. Christine Lagarde, ECB President, could hint at further cuts. The market currently expects a second cut towards the end of Q3 or in Q4.
Friday: US employment data
Our thoughts: April’s payrolls report, released in early May, was significantly weaker than expected with 175,000 jobs added falling from 303,000 in March. This was well below the 240,000 expected. May’s data, released on Friday, is anticipated to show some recovery in the labour market. Many market participants will be hoping for some gentle softening of the labour market, which remains too tight, keeping wage pressures and inflation stubbornly elevated. Unemployment is expected to hold steady at 3.9%.
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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.
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