Introduction
The global financial markets continue to grapple with a complex mix of geopolitical tensions, inflationary pressures, and evolving central bank policies. The past year has seen significant shifts in market dynamics, with varying impacts across different regions. This commentary provides an overview of the key factors influencing financial markets in the UK, Europe, the United States, the Far East, and emerging markets.
UK
The UK financial markets are adjusting to the latest policy moves by the Bank of England which maintained the rate to 5.25% in an effort to combat persistent inflation. The FTSE 100 has shown significant gains, bolstered by strong performances in the energy and financial sectors. The housing market has shown signs of cooling as higher borrowing costs start to impact affordability.
The FTSE 100 has shown resilience, supported by the strong performance of energy and commodity sectors. It hit record highs in June and whilst the last week of May saw a slight fall, it has been a very good month overall for UK equities. However, uncertainties surrounding trade agreements and regulatory changes continue to pose risks and a general election will always produce a little turbulence.
The timing of July’s election may well have been based on positive news on inflation and energy bills coming down in the summer months, but it is worth noting that there has been little correlation over the years between the performance of the FTSE100 and which political party is in government. Markets dislike uncertainty which an election can temporarily bring, but they have little medium to long term interest in politics so investment decisions should not be based on the results in July, whatever they are. They will undoubtedly throw up challenges and opportunities for future tax planning over time but we will address these with you as they arise.
The energy price cap will come down by 7% and average energy bills will be £1568 in July, saving £122 pa for a typical bill which is the lowest level in two years, but bills are still averaging over £400 per year than three years ago. An increase is expected in October as we head into winter, so the good news may be short lived and there may be consumer apathy towards switching energy tariffs given there has been little reason for moving in recent years during a period when the energy regulator has controlled pricing.
Europe
European markets in May 2024 reflect a region still dealing with economic fragmentation. The European Central Bank (ECB) has maintained a cautious stance with a key interest rate at 3.75%, aiming to balance growth and inflation control. The DAX and CAC 40 have experienced mixed performance, with manufacturing sectors facing headwinds from supply chain disruptions and energy price volatility due to the prolonged Ukraine conflict. However, the tech sector has seen a rebound, driven by innovation and increased digital adoption across the continent.
Speculation about the ECB potentially cutting interest rates in response to falling inflation continues. Pablo Hernandez de Kos, the Governor of the Bank of Spain and a member of the ECB Governing Council, suggested June could be a starting point for rate cuts if economic forecasts hold true. Inflation, which was in double digits in autumn 2022, moderated to 2.6% in March 2024 and is projected to average 2.3% this year and 2% in 2025. Interest rates remained unchanged at the ECB’s April meeting, and pay growth slowed from 4.4% in February to 4.1% in April.
The eurozone’s monthly trade surplus hit a record high of €27bn in March, largely due to a 2.1% increase in exports and a 4% decrease in imports. Confidence in the eurozone economy is improving, with business and consumer confidence rising from 96.3 in March to 97.1 in April. However, economic circumstances vary across member states.
In Germany, for instance, the Bundesbank expects a slight GDP decline in the first quarter of 2024, partly due to reduced domestic and foreign demand for German industrial products. Germany’s DAX index rose by 4.61% in April to 19,050 points, driven by strong corporate earnings.
Spain saw a 0.6% GDP increase in the final quarter of 2023, and the Spanish economy is expected to continue growing modestly. Meanwhile, Ireland is forecasted to experience solid growth due to rising wages and falling inflation, with modified domestic demand expected to grow by 2.3% in 2024 and 2.5% in 2025. This comes as Simon Harris replaces Leo Varadkar as leader of Fine Gael and Taoiseach.
In business news, German food delivery company HelloFresh downgraded its earnings forecast, causing shares to plummet by over 40%. Italian luxury fashion house Gucci predicts a 20% sales decline in Q1 2024, partly due to a slump in sales in the Asia-Pacific region.
Portugal’s President Marcelo Rebelo de Sousa has invited Luis Montenegro to form a minority government after the Democratic Alliance fell short of a majority. The French CAC 40 index increased by 3.51% to 8,490 points, supported by gains in the tech sector and a resilient consumer market.
United States
In the United States, May was marked by significant market movements as the Federal Reserve’s aggressive monetary tightening continues. With the federal funds rate now at 6%, inflation shows signs of moderating, but economic growth has also slowed. The S&P 500 and NASDAQ have experienced volatility, with tech and growth stocks particularly sensitive to interest rate hikes. The labour market remains tight, although wage growth is starting to decelerate. Investors are closely watching the upcoming presidential election, which adds a layer of short-term uncertainty to the market outlook.
The Federal Reserve’s decision to keep interest rates high at 6% reflects its ongoing battle against inflation. Despite moderating inflation, the economy has slowed, and the impact on growth stocks and tech sectors has been pronounced. Wage growth, while still positive, is beginning to decelerate, which may ease some inflationary pressures.
The labour market remains tight, with employers adding 275,000 jobs in April. However, the unemployment rate slightly increased from 3.7% to 3.9%, reflecting a more cautious hiring approach amid economic uncertainties. The S&P 500 and NASDAQ experienced significant volatility, with investors reacting to mixed economic signals and corporate earnings reports, but May was ultimately a good month for US stocks, with each index registering gains—2.3% for the Dow, 4.8% for the S&P, and 6.9% for the Nasdaq.
The upcoming presidential election between incumbent Joe Biden and former President Donald Trump adds a layer of uncertainty to the market. Historical data suggests that markets often experience volatility during election years, as investors react to potential policy changes and economic priorities of the candidates. However, the long-term impact on markets tends to be limited and, as in the UK, investment decisions should focus on fundamental economic indicators rather than political developments.
Far East
The Far East markets have shown resilience of late, despite ongoing geopolitical challenges. In China, the Shanghai Composite has recovered some losses following the relaxation of stringent COVID-19 lockdowns and stimulus measures aimed at revitalising the economy.
However, the tech sector faces regulatory scrutiny, dampening some investor enthusiasm. Japan’s Nikkei 225 has performed well, supported by strong corporate earnings and accommodative policies from the Bank of Japan, despite the challenges posed by a weakening yen and global supply chain disruptions.
China’s economic recovery has been supported by the relaxation of COVID-19 lockdowns and government stimulus measures. The Shanghai Composite has regained some lost ground, although regulatory scrutiny in the tech sector remains a concern. Premier Li Qiang has acknowledged ongoing challenges in the economy, including issues in the real estate sector and the need for stronger regulation of financial markets.
The tech sector in China faces significant regulatory hurdles, impacting investor sentiment. Despite this, other sectors such as manufacturing and consumer goods have shown resilience. Japan’s Nikkei 225 has benefited from strong corporate earnings and supportive monetary policies, although global supply chain disruptions and a weakening yen pose challenges.
Japan’s export market continues to perform well, driven by strong demand for electrical machinery and cars. Official data showed a 7.8% year-on-year increase in exports, with significant growth in shipments to the US and EU. However, geopolitical tensions, particularly with China, remain a concern.
Emerging Markets
Emerging markets are navigating a turbulent environment characterised by capital outflows and currency volatility. Countries like Brazil and South Africa are particularly affected by rising global interest rates, which have led to higher borrowing costs and inflationary pressures.
India continues to be a bright spot with strong economic growth driven by robust domestic demand and a thriving tech sector. The strength of the US dollar remains a significant challenge, impacting trade balances and debt servicing costs across emerging economies.
Brazil’s economy grew by 2.9% last year, supported by strong performances in the agriculture, industrial, and service sectors. However, rising global interest rates and inflationary pressures pose challenges. South Africa faces similar issues, with higher borrowing costs impacting economic growth and consumer spending.
India’s Economic Growth
India’s GDP grew by 8.4% in the final quarter of 2023, driven by strong domestic demand and a thriving tech sector. The International Monetary Fund predicts that India’s economy will grow by 6.5% in 2024, potentially overtaking Japan and Germany as the third-largest economy in the world in the coming years. The manufacturing sector, in particular, has shown impressive growth, expanding by 11.6% in Q4 2023.
India’s robust economic performance has been further bolstered by the approval of three new semiconductor plants and the signing of a free trade agreement with Norway, Switzerland, Iceland, and Liechtenstein (EFTA states). This agreement is expected to boost economic progress and create opportunities for young people in India.
In sanction-hit Russia, Vladimir Putin secured a controversial re-election victory this year and many foreign companies have exited Russia in response to the country’s invasion of Ukraine. According to Russia’s RBC Daily, departing businesses have paid 35.7bn rubles to Russia’s budget as of March 15, which is 17 times the 2.1bn rubles Russia had expected for the whole of 2024.
Conclusion
In summary, the global financial markets are still navigating a period of heightened uncertainty and volatility. Regional differences highlight the importance of a well-diversified portfolio and the need for investors to take a long-term view and stay invested. The UK shows positive signs with decreasing inflation and strong performances in the energy and financial sectors, despite ongoing challenges in the retail and housing markets. Europe faces mixed economic prospects, with cautious optimism amid economic fragmentation and geopolitical tensions. The United States grapples with high interest rates and election-related uncertainties, while the Far East exhibits resilience amid regulatory scrutiny and geopolitical challenges. Emerging markets face capital outflows and currency volatility, with India standing out as a bright spot due to its strong economic growth and robust domestic demand.
As we move forward, monitoring central bank policies, geopolitical developments, and economic indicators will be crucial in understanding and anticipating market movements across different regions. We should remain focused on long-term fundamentals, maintain diversified portfolios, and be prepared to navigate the ongoing uncertainties in the global financial landscape.
And Finally…
Did you know that many animals experience time differently from humans?
To smaller animals like Salamanders or Lizards, the world around them moves much slower compared to not only humans, but also other animals like Cats and Dogs.
This is because their perception of time depends on how quickly the brain can process incoming information.
Sources
Market data
Market Data – Latest Financial News & Data – BBC News
Markets data – stock market, bond, equity, commodity prices – FT.com
All Market data dashboard | London Stock Exchange
Global Markets Data | Breaking Stock Market News | Reuters
Business
Business | Latest News & Updates | BBC News
Industry Reports | Choose From 100s of Global Industries (mintel.com)
Economic output and productivity – Office for National Statistics (ons.gov.uk)
Commentary
Global Weekly Commentary – Insights | BlackRock
Market commentary | Vanguard UK Professional
Market Insights | J.P. Morgan Asset Management (jpmorgan.com)
