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Market Update May 2024

Countdown to UK general election begins


• UK Prime Minister Rishi Sunak announced a general election on 4 July.

• A record number of Conservative MPs stand down in response.

• UK inflation falls to three year low

• Risk appetite returns to equity markets

• The US Dow Jones index surpasses 40,000 points for the first time.

• Swedish Riksbank cuts interest rate, becoming the second central bank in Europe to do so in 2024.

• President Biden announces new tariffs on Chinese goods.

• Donald Trump becomes the first former US president convicted of felony crimes

• Iranian President Ebrahim Raisi killed in helicopter crash

• Prime Minister of Slovakia Robert Fico is injured in a shooting in Handlová, Slovakia

 

Most equities markets resumed their ascent during May. Data continues to show a gradual decline in inflation and cooling of labour markets. This is reinforcing beliefs that the US Federal Reserve and other major central banks will start cutting interest rates later in the year. The Swedish Riksbank did cut their rate in May, becoming the second central bank in Europe to do so following the Swiss National Bank in March. Global bonds also benefitted from the rate-cutting expectation.

 

Expectations of rate cuts favoured growth stocks, with Nvidia enjoying a particularly strong month. The share price of the AI chip maker surged to a record high following the release of a strong set of quarterly results. US equities outperformed during the month, with the Dow Jones Industrial Average Index closing above the 40,000 level for the first time in its 139-year history.

 

A sign of investor exuberance can be seen in the low level of the VIX Index, which is traditionally referred to as the Wall Street Fear gauge. It fell to its lowest level since November 2019, indicating investor’s continued confidence in stock markets. A further sign of exuberance is the revival of the so-called ‘meme stock’ trade, which became popular during the pandemic lockdowns. Investors flocked to buy certain shares based on social media recommendations, rather than any fundamental reason. These stocks, including GameStop and AMC Entertainment, made sizeable speculative gains that were immediately followed by heavy losses. Defensive stocks generally underperformed, but still produced a positive return.

 

Prime Minister Rishi Sunak announced that this year’s general election will take place on the 4th of July. With the date now set, the pressing question on everyone’s mind is: After 14 years of Conservative government, is Keir Starmer poised to lead the Labour Party to victory?

 

Although Sunak had previously indicated that his 'working assumption' was for the election to be held in the second half of the year, with expectations of waiting until the autumn and a further tax-cutting budget announcement, he decided to seize the moment this week following positive economic news. His announcement came just a day after UK inflation figures were published, revealing that inflation had fallen to 2.3%, just shy of the Bank of England's 2% target and the lowest level in almost three years.

 

Should Labour succeed in taking over following the election, it will be the party's first time governing in a post-Brexit Britain, bringing both new challenges and opportunities. Additionally, it will inherit an economy with weakened growth, poor productivity, and high taxation, a public sector struggling under immense pressure while draining government funds and a debt-to-GDP ratio limits fiscal options. Many argue that this scenario is hardly ideal for a party historically associated with higher taxes, increased spending, and a preference for a larger role for the state in society.

 

The surprise announcement of the election has been viewed by some as reducing the likelihood of the Bank of England cutting rates before July, for fear of being perceived as political. This may have contributed to Sterling enjoying a reasonably strong month, as FX markets generally favour higher yielding currencies. The pound rose 1.6% versus the US dollar and achieved a near two-year high compared to the euro. This comes after data showed the British economy beat growth expectations in the first quarter of the year to confirm it has exited its technical recession. This created a headwind for the larger UK companies that produce a large portion of their revenue overseas. A stronger sterling also created a headwind for investments in international equities for UK investors.

 

The recent revival for Chinese equities stuttered during a month in which US President Joe Biden announced steep rises in tariffs on imports of Chinese EVs, batteries and solar panels. A data release also pointed to weak retail demand. Other emerging markets were also broadly weak. Emerging markets continue to show the strongest earnings growth of any region, including the US.

 

Turning attention to commodities, the price of oil retreated due to rising supply. The price of copper rose sharply on the expectation of rising demand, particularly from electric cars and data centres. The price cooled later in the month due to rising exchange inventories and the more negative Chinese growth data.


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


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