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Market Update June 2024

Magnificent Seven ride higher

  • US mega-cap technology stocks continue to lead equity markets higher.

  • Chipmaker Nvidia overtook Apple as the world’s second-most valuable public company.

  • European Central Bank cuts interest rate for first time since 2019.

  • French President Emmanuel Macron calls snap elections.

  • Indian Prime Minister Narendra Modi formed a coalition government after his party unexpectedly failed to win a majority.

  • Joe Biden produces an unconvincing debate performance against Donald Trump.

 

Global equity markets rose further during June, although gains were mostly concentrated in the US mega-cap technology names, which have been commonly referred to as the ‘Magnificent Seven’. The markets broadly took any bad news in their stride. This included a hot US jobs print for May, which raised concerns of an overheating US economy, and political turmoil in France. President Macron announced a snap French election, with the first round resulting in a lead for Marine Le Pen’s far-right National Party. This did result in weakness for French equities, which spilt over to broader European markets. Emerging markets outperformed, with Indian equities performing particularly well, driven by strong foreign inflows.

 

Markets preferred to focus on the positives around inflation, which continues to show evidence of slowing. This should give central banks the freedom to cut rates. After months of anticipation, the European Central Bank (ECB) finally cut interest rates for the first time in five years in June. This move, positions the EU as the second major global economy to reduce its lending rate, following Canada's rate cut just a day earlier. The ECB's decision marks significant progress in tackling inflation and was widely welcomed by both consumers and businesses across the continent. This reduction in interest rates is expected to stimulate economic activity by making borrowing more affordable.

 

With the ECB taking the lead in cutting rates ahead of the Bank of England (BoE) and the US Federal Reserve (FED), investor attention is now shifting towards these regions. Many are wondering when the UK and US will follow the ECB’s example, particularly since UK inflation fell back to the BoE’s target rate of 2% in May. Recent positive corporate earnings data and evidence of a mild and controlled economic slowdown further support the anticipation.

 

In the UK Andrew Bailey, the Governor of the BoE, has said that he is optimistic that inflation is moving in the right direction, with markets currently pricing in a UK rate cut in August this year. Unfortunately, things look less optimistic in the US. While the regions latest CPI print provided reassurance that inflation is slowing, recent jobs data showed higher-than-expected employment growth, complicating the Federal Reserve's position on cutting interest rates. As a result, analysts have gone from anticipating six to seven rate cuts for the US at the start of the year to only one or two, with the first in September, at the earliest. While there is little doubt that rate cuts in other major regions are coming, the timing remains uncertain.

 

The expectation of rate cuts in the second half of 2024 helped the performance of funds that are invested in bonds. The UK 10-year government bond yield fell 0.14% during June, which meant that prices rose, due to the inverse relationship between bond yields and prices. Bonds issued by companies slightly underperformed those issued by governments but still produced a positive return.

 

Towards the end of the month, Joe Biden and Donald Trump faced off in the first debate of the 2024 US presidential campaign. The debate was widely reported as a disaster for Biden, whose disjointed performance shocked and angered many loyal Democrats. Some have openly questioned whether he should continue to seek a second term. By the following morning, many Democrats were urging Biden to step aside for a younger nominee, suggesting potential replacements. However, the current President seems determined to continue his campaign.

 

During the month, we moved to an overall moderate “Risk On” position within our client portfolios, from slightly below neutral previously. The trend of corporate earnings growth has started to broaden out beyond the mega-cap tech stocks. We see this as a positive sign for equities generally as it provides evidence that companies across sectors are dealing with slower economic growth and can increase earnings in this environment.  This economic slowdown is so far looking like the “soft landing” that investors were hoping for as interest rates peaked at the back end of last year. Also, we view the chances of a “Liquidity Event” and a sharp move down in markets due to the Fed’s over-tightening of monetary policy as greatly reduced.  We see this as a clear positive for growth markets like equities going forward.


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This document has been prepared for Ermin Fosse Financial Management LLP and is for information purposes only.


It should not be taken as advice and does not constitute a recommendation to buy or sell securities or to invest in any of the markets and/or sectors referenced.

This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product.


Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Ermin Fosse’s services.

Please contact us before you invest / disinvest. The past is not indicative of future results. When you invest you may not get back what you put in. Errors and omissions excepted.


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