Market update: Mixed picture as Western equity markets rally but growth slows

This June 2024 market update is brought to you by Marlborough Investment Management

Mixed picture as Western equity markets rally, growth slows and European Central Bank cuts interest rates.


Inflation edges down, consumer confidence rises

The annual inflation rate in the UK eased to 2.3% in April, compared to March’s reading of 3.2%. Despite being slightly higher than market forecasts of 2.1%, this was still a three-year low for inflation and was largely due to the 12% reduction in regulator OFGEM’s energy price cap feeding into the figures.

Consumer confidence continued to improve, beating forecasts and reaching its highest level since December 2021.

However, the UK’s Composite Purchasing Managers’ Index (PMI) survey saw a slight pull back in May to 52.8, below the expected level of 54. This was due to a slowdown in services sector PMI as companies continued to adapt to higher interest rates.


Is the economy finally cooling?

Following lower gross domestic product (GDP) data in April, there were further signs that the world’s largest economy was slowing.

Inflation once more trended lower, moving down to 3.4%. The gauge of inflation preferred by the Federal Reserve (the Fed), personal consumption expenditure (PCE), was in line with expectations and the core inflation reading was lower than anticipated.

These are gradual changes and highlight that any slowing will be over time. So, expectations remain that the US will not enter a severe recession (and may avoid one altogether). Fed members remain cautious and have said interest rates may remain higher for longer.

One company was at the forefront of many investors’ minds in May, chipmaker Nvidia, which announced earnings that surpassed estimates for the sixth consecutive quarter. This suggests the artificial intelligence revolution and the demand it is creating may continue for some time.


First interest rate cut

Eurozone data continued to improve, with the unemployment rate falling to 6.4% in April, after five months at 6.5%. This was below market forecasts that it would remain at 6.5%.

The manufacturing sector has suffered with interest rates higher for longer, but the month’s manufacturing PMI saw a marginal improvement, moving from 45.7 to 47.4. Although still in contractionary territory, this is the highest reading in 15 months, which is positive.

Core inflation surprised, as it rose to 2.9%, which was ahead of market expectations of 2.8% and came after nine consecutive months of falling inflation.

The European Central Bank announced a 0.25% interest rate cut after the month end, but with price pressures remaining, the path of interest rate cuts from here looks uncertain.


Sentiment turns against Japanese equities

Japanese equities traded sideways during May. GDP figures for the final quarter of 2023 were revised down and figures for the first quarter of this year came in at -0.5% (subject to revision).

There has been a shift in sentiment towards Japanese stocks, with May seeing money flow out of the market.

The yen remains weak against the US dollar and Japan’s Ministry of Finance confirmed it defended the currency against further weakening at the end of April.

Asia and Emerging Markets

Asian companies beat earnings forecasts

China’s central bank has rolled out a series of measures to prop up the country’s ailing property sector. These include a 300 billion yuan relending facility established by the bank to help local state-owned enterprises purchase completed but unsold buildings and convert them into affordable housing.

The market has so far shrugged off the aid as inadequate and expects more funding to be required by the end of the year.

The Hang Seng index lost around 0.7% in local currency terms over the month. Elsewhere in Asia, first-quarter earnings season is now complete. Corporate earnings have been on average 6.3% ahead of consensus expectations, with 64% of companies in the region meeting or beating their Bloomberg estimates.

In emerging markets, elections have been dominating the headlines, as South Africa, Mexico and India all headed to the polls. The final results were all announced after the month end.

Mexico elected its first female president with a large majority, suggesting policy continuity, while in India Narendra Modi failed to win the forecast landslide and his BJP party lost its outright parliamentary majority.

In South Africa, the nation’s largest party, the ANC, suffered an even greater fall in popularity than expected and will need to form a coalition with a minority party.

Fixed Income

A mixed picture Overall yields[1] did not move far during

May as incoming data continued to paint a somewhat mixed picture of the state of the global economy and the outlook for monetary policy in the second half of the year.

In the US, data during the month certainly tended towards the softer side, with significant downside surprises in services and manufacturing surveys, retail sales and the key non-farm payrolls employment report.

This combination was sufficient to push yields lower initially, only for momentum to turn in the second half of the month pushing yields back to roughly where they stood at the end of April.

Inflation data was a little more concerning in the Eurozone and UK as both saw upside surprises resulting in a dialling back of rate cut expectations for the coming months.

The announcement of a UK election on July 4th had little or no impact on UK fixed income markets, largely because the outcome seems all but certain in the eyes of most market participants.

Source: Morningstar Direct

[1] Yield: Yield is the income from an investment, usually stated as a percentage of the value of the investment

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