Weekly Markets Review

1st July 2024

Markets last week

Summary

• There were further signs of disinflationary trends in the US, as the Federal Reserve’s (Fed) preferred measure, Core Personal Consumption Expenditures (PCE), fell to its lowest level since March 2021. Canada and Australia both bucked this trend by printing higher-than-expected Consumer Price Index (CPI) figures. Meanwhile, US Gross Domestic Product (GDP) growth was revised marginally higher for Q1 2024

• US equities hit all time highs, as Nvidia recovered from its late-month slump, whilst other technology stocks rallied with Amazon reaching a market-cap of $2trn for the first time

• European markets were generally weak, with France’s CAC 40 Index striding to another low, as the country approached the first round of elections over the weekend. Several major eurozone economies also released inflation prints during the week, mostly showing progress

• Asia was mixed, as Chinese equities were relatively subdued on the back of weaker economic data, whilst India finished the week with strength and Japan’s Topix hit a 34-year high, just as core inflation surprised to the upside

• Treasury yields were volatile and finished the week lower, as markets digested large auctions, in conjunction with pockets of surprise inflation outside of the US. Interestingly, the US 10-year yield is back to where it began the quarter, around 4.3%

• Commodities were mixed with a volatile oil price, due to geopolitical tensions and weaker US demand, gold ending the week marginally higher, and copper continuing its downward trend following the recent weak Chinese economic data.
  

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The week ahead

Headlines are likely to be dominated by two major elections, with France set for round two over the weekend and the UK going to the polls on Thursday.

Eurozone inflation data will be released on Tuesday, following Germany’s report on Monday. A slowdown is expected in both headline and core numbers.

US Non-Farm payroll data will be unveiled on Friday, with economists expecting around 189k jobs to be added in June.

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US

Several key economic data points were released last week, including Core PCE inflation, which fell to 2.6%, its lowest level in around three years and in line with expectations. Several Fed officials cited a need to see further progress on hitting the 2% target before rate cuts can be considered. Importantly, GDP growth was revised higher for Q1 2024 to 1.4% (vs 1.3% previously), putting hard landing concerns at bay once again. There were two somewhat contrary indicators during the week, with continuous jobless claims being revised higher to 1.839m for the week ending 14 June, and lower consumer confidence, albeit slightly better than expected. Economists highlight the nuance in the confidence indicator, with consumers believing that inflationary concerns will abate, but that real income growth will likely deteriorate further from here. Elsewhere, macro strategists have raised alarms over the uptick in inflation across other developed markets, including Canada (notably for transport, groceries and healthcare) and Australia, with an uptick in travel costs cited as one of the key factors.

Irrespective of the macro backdrop, equity markets were almost entirely driven by the rebound in technology stocks, particularly Nvidia, but also Amazon, which surpassed $2trn in market-cap for the first time. Investors continue to remain positive on prospects for artificial intelligence, even though some analysts continue to point to stretched valuations.

Bond markets began the week in volatile fashion, partly predicated on the large treasury auctions which were met with lower-than-average liquidity, as well as the aforementioned surprisingly strong Canadian inflation data. By the end of the week the markets were more settled following the release of the US Core PCE numbers.

United Kingdom

UK GDP was revised higher for the quarter to 0.7% from the first estimate of 0.6%. Although this was the fastest quarter of growth since late 2021, more recent data suggests that the economy is slowing, with economists referencing the moderation in Purchasing Managers’ Indices (PMI). Meanwhile, the Lloyds business barometer fell back from its highest reading since 2016, which some suggest is to do with election jitters. The FTSE 100 and 250 both struggled for direction and ended the week marginally lower.

Europe

Inflation rates continued to make progress in three of the largest eurozone economies. Italy’s annual rate remained unchanged at 0.8% for the third month in a row, and below expectations of a rise to 1%. Spain’s CPI rate eased to 3.4% from a one-year high of 3.6%, although economists had expected it to fall to 3.3%. France surprised the most, with a reading of 2.1%, which is the lowest level since August 2021. Strategists were not convinced that this could help the Centrists win at the polls, and indeed the latest data over the weekend suggests a majority for Marine Le Pen is more likely. French markets reacted badly during the week to early polling data, with the CAC 40 producing its worst quarterly performance in two years. Furthermore, the gap between German and French 10-year borrowing costs reached 0.85% on Friday, which is the highest level since the eurozone debt crisis in 2012.

Japan

Both Core CPI and industrial production were firmer than expected, further indicating that Japan’s post COVID-19 recovery is continuing. The yen is still in the crosshairs after falling to multi-decade lows against the dollar. Some expect the Bank of Japan’s hand to be forced into raising rates in light of lower US Core PCE numbers. The currency situation has been a blessing for Japanese equities, which generate significant overseas revenues, with the Topix reaching a 34-year high.

Emerging markets

India’s stock market reached an intraday record high on Friday, before paring gains towards the end of the session. The Indian economy and corporate earnings have both continued to surpass expectations this year, which has resulted in soaring investor confidence. Conversely, news out of China was not compelling. The construction index dropped to its lowest level in nearly a year, and factory activity contracted for a second straight month. Part of the reason is due to the ongoing trade war with the United States, which has seen further tariff increases on Chinese imports this year.

Commodities

Oil began the week with strength on the back of increasing geopolitical tensions in the Middle East, before retracing due to a surprise increase in US inventories, which indicates softer demand. Gold ended the week marginally higher, with some strategists suggesting that investors sought safe havens following tentative signs of a wider economic slowdown. Copper, the widely followed industrial cycle barometer, experienced another negative week on the back of Chinese economic data.

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