Market Review 19th August 2024

Everything you need to know, Simplified!

Markets last week

Summary

• Equity markets recovered robustly in light of positive economic data and investor optimism

• US tech led the charge rising nearly 8%

• Growth stocks outpaced value shares, reflecting optimism surrounding potential interest rate cuts

• Easing inflationary pressures in the US and UK bolstered sentiment

• Investors were buoyed by signs of economic growth across the eurozone

• Japan’s stock market rebounded strongly, supported by a weaker yen and positive US data

• UK inflation rose slightly to 2.2% in July, softer than expected, with core inflation hitting its lowest level since September 2021

• UK services inflation, which has been sticky, dropped to 5.2%, its lowest level in two years

• Global bond yields stabilised, with the US 10-year Treasury yield declining slightly

• Federal Reserve (Fed) Chairman Powell is expected to solidify the Fed’s intention to begin policy easing at the September Federal Open MarketCommittee meeting, during his speech at the Jackson Hole Economic Policy Symposium.

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Markets last week

Market environment

Markets exhibited a robust recovery last week, as a combination of positive economic data and investor optimism helped buoy sentiment. US stocks, particularly the tech sector, led the charge. The overall mood continued to improve following the volatility seen earlier in August, with hopes growing for a soft landing as inflation pressures eased.

European markets saw solid gains, with improving economic data providing further momentum. Meanwhile, Japan’s stock market rebounded strongly, supported by a weaker yen and positive US economic data, while Chinese equities edged higher despite mixed domestic indicators.

US equity market recovery

US equities recorded notable gains, with the technology sector up nearly 8% boosted by a strong performance from artificial intelligence chipmaker NVIDIA, which soared nearly 19%. Growth stocks, particularly in tech and consumer discretionary sectors, outpaced value shares, reflecting broader optimism around the potential for sustained economic growth.

This positive sentiment was further bolstered by strong retail sales data towards the end of the week. Retail sales jumped by 1% in July, the strongest performance in 18 months. This, combined with core producer price inflation coming in flat, signalled a further easing of inflationary pressures. The Consumer Prices Index data also showed inflation moderating more than anticipated, with annual headline inflation softening below 3%, further reassuring investors that price pressures are easing.

Promising UK inflation data

UK inflation ticked up slightly in July, rising to 2.2% year-on-year from 2.0% in June, but this was a softer increase than both economists and the Bank of England had forecast. While policymakers had been bracing for a more significant rise, the modest uptick—combined with a cooling in core and services inflation—was enough to alleviate some of the remaining concerns about persistent price pressures.

Critically, core inflation, which excludes volatile food and energy prices, hit its lowest level since September 2021. Services inflation, which has been particularly sticky dropped to 5.2%, its lowest level in over two years. The July data highlights that inflationary pressures are subsiding, reinforcing the case for an easier monetary policy stance going forward.

European equities gain on rate cut hopes

European equity markets experienced strong performance last week, driven by encouraging economic data and growing optimism around further monetary policy easing. Investors were buoyed by signs of economic growth across the eurozone economy, Germany’s industrial weakness appeared to have a limited impact on overall sentiment. Growth stocks outpaced value shares as the prospect of lower interest rates bolstered sectors with higher sensitivity to borrowing costs, such as technology and consumer discretionary.

Stable bond markets

The bond market remains cautious, with global yields stabilising after recent volatility. The US 10-year Treasury yield declined 0.06% as inflation continued to moderate. European bond markets were relatively quiet as analysts await further economic data. The German 10-year bund yield rose 0.02% while the UK 10-year gilt yield fell 0.02%.

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The week ahead

Friday: US Jackson Hole Economic Policy Symposium

Our thoughts: In his speech, Fed Chairman Powell is very likely to solidify the Fed’s intention to begin policy easing at the September FOMC meeting. The uncertainty lies in how dovish Powell will be, given the steep softening in the US labour market immediately following the July meeting and the subsequent market volatility. Some market participants anticipate that, considering the recent economic weakness and market volatility, the Fed may opt for a 0.5% cut rather than the typical 0.25%. This decision will likely depend on further economic insights between now and the September meeting, with Powell unlikely to reveal too much ahead of time.

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