22nd July 2024
Markets last week
Summary
Former US president Donald Trump's political popularity surged following his survival of a failed assassination attempt
Incumbent US president, Joe Biden dropped out of the presidential race amid growing pressure from senior members of his own Democrat party
Current US vice president, Kamala Harris is likely to become the new Democratic candidate
Trump selected current US state senator (Ohio) JD Vance as his vice-presidential running mate
US treasury yields rose, with the 10-year yield closing at 4.24%
A global IT outage caused by a defective update from US cybersecurity company, CrowdStrike affected organisations worldwide
US mega-cap tech stocks performed poorly, dragging the overall marketdown
In the US, outside of the tech sector, market performance was more positive, with energy, real estate, consumer staples, and financials doing well
The VIX index spiked to its highest level since April, indicating increased market uncertainty
European equities declined, with tech being the worst-performing sector due to concerns of the semiconductor industry
The European Central Bank (ECB) left monetary policy unchanged and is cautious about future rate cuts, with a decision in September uncertain
UK inflation data exceeded expectations, with services inflation at 5.7%, core prices at 3.5%, and headline inflation at 2.0%
The Bank of England (BoE) may have a window to cut rates in August, but further cuts are uncertain due to expected higher inflation
UK equities — particularly mid-caps — performed relatively well.
Markets last week
Market environment
Political and economic developments shaped market dynamics this week. The surge in popularity for Donald Trump, unwinding concentration risk in the US tech sector, cautious monetary policy from the ECB, rising UK inflation, and geopolitical risks all impacted the landscape. On Friday, a global IT outage due to a defective update by cybersecurity company CrowdStrike, significantly impacted business and daily life. This disruption affected organisations worldwide and contributed to existing turbulence in the tech sector. These factors resulted in poor performance from the narrow cohort of US mega-cap tech-related stocks that have been so prominent year-to-date. Outside of the tech the market performance was more positive.
US political developments: Biden bows out
The political landscape in the US took a dramatic turn last week following the failed assassination attempt on Donald Trump. Trump, emerging resilient and undeterred, has seen a surge in his popularity. This contrasted starkly with incumbent president, Joe Biden's prospects as he struggled to demonstrate his fitness for office. With a Trump presidency and a Republican clean sweep looking increasingly likely, the Democrat machine has now finished with Joe Biden as calls for him to step down grew increasingly louder, with Biden ultimately dropping out of the race on Sunday. The Democratic National Convention, scheduled for August, will determine the new candidate with current vice president, Kamala Harris the most likely replacement candidate.
Trump's campaign has gained further momentum with the selection of JD Vance as his vice-presidential running mate. The appointment of Vance — who was at one point opposed to Trump but now has thrown his full support behind him — signifies a clear indication of Trump’s intention to pursue an assertive agenda if re-elected. This includes expansive fiscal policies, tax cuts, a clampdown on immigration, and increased tariffs on imports — echoing protectionist measures from the past.
These policies are anticipated to elevate US inflation — implying that interest rates and bond yields may remain higher than they would under a Democratic administration. The US yield curve has steepened to reflect this interpretation as Trump’s odds have improved. Treasury yields rose last week with the 10-year yield closing at 4.24%.
Turbulent tech
The tech sector faced turbulence last week with ‘big tech’ experiencing a notable downturn. Despite mega-cap tech-related shares falling, earnings released over the week indicated continued profitability in the sector, although at a slower pace. Many analysts have concluded that the fall presents a ‘buy-the-dip’ opportunity as the sector's outlook remains optimistic. Upcoming earnings will be crucial as they could influence the recent shift from tech-heavy investments to broader market exposure as analysts decide whether the positive outlook justifies the elevated valuation of the sector. At the end of the week, turbulence in tech escalated further due to a global computer systems outage impacting organisations worldwide.
Over the course of the week, US equities declined -1.4%. The ‘magnificent seven’ (a collection of leading mega-cap technology-related stocks, Microsoft, NVIDIA, Apple, Alphabet, Amazon, Meta and Tesla) contributed the entire index decline. If these seven companies are excluded the index was effectively flat for the week. Most sectors ended in positive territory with energy, real estate, consumer staples and financials amongst the best performing sectors. Tech was the worst performing sector by a considerable margin — falling 4.6%.
The dramatic unwinding in tech stock exposure, particularly within the US, has been marked by a spike in volatility. The VIX index, a measure of uncertainty in the US equity market, spiked to its highest level since April, rising from 12.5 to 16.5.
European equities suffered more broadly than the US with nine of eleven sectors falling. Tech was the worst performing sector declining over 10%, driven predominately by the semiconductor industry, as geopolitical concerns arose around the prospect of the US introducing export restrictions on companies selling advanced chips to China.
A cautious ECB
The ECB left monetary policy unchanged last week, as anticipated, and is becoming increasingly cautious about its next moves. Policymakers are debating whether to cut interest rates just once more this year, with a decision in September still uncertain. ECB President Christine Lagarde left the question of further rate cuts wide open emphasising that future decisions will depend on the data, with wage growth and services inflation being particularly key as these areas remain uncomfortably high.
The ECB’s hesitation is also influenced by the Federal Reserve’s (Fed) adjustment of its rate-cut projections, from three cuts to just one this year. This international policy context is crucial, as the ECB must consider the nominal rate differentials between the US and the eurozone. The lack of commitment to further rate cuts has affected sentiment toward European sovereign bonds, particularly German bunds, which have struggled to garner much of a bid following the ECB’s initial cut last month.
UK inflation
UK inflation data released last week came in above market expectations. Service inflation remains at 5.7%, with core prices at 3.5%, while headline inflation stands at 2.0%. This gives the BoE a potential window to cut rates in August. However, inflation is expected to trend higher in the coming months, suggesting that any rate cut might be a one-off for now.
UK GDP prospects appear relatively firm, and there is no urgent need for the BoE to cut rates immediately. Additionally, some fiscal expansion is anticipated, although the new Labour government is proceeding cautiously to reassure markets of their financial prudence.
UK equities continue to perform well relative to other regions. Particularly the more domestic- focussed mid-cap space as the FTSE 250 fell -0.6% holding up well relative to other markets.
The week ahead
Thursday: US GDP and core PCE inflation
Our thoughts: The US economy is anticipated to have grown at an annualised rate of 1.9% in the second quarter, accelerating from 1.4% in Q1. This is a solid level of economic performance that will bolster the Fed’s confidence around their monetary policy approach as the central bank seeks to bring in the US economy to a soft landing — normalising inflation without severe economic consequences. Simultaneously, the Fed’s favoured inflation gauge, core PCE is expected to show inflation consistent with the 2% target. This would give the Fed further confidence to cut interest rates with September looking like the most likely moment.
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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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