Market Commentary July 2024

Dafferns Wealth

June 2024 was a big month for global financial markets, marked by significant volatility and key economic developments. The interplay of geopolitical tensions, economic data releases and central bank policies shaped market sentiments across various regions.

Inflation slowed to 2% in May, which is in line with the Bank of England’s target. However there is still inconsistency in the underlying detail, as some prices continued to rise beyond expectations. The Bank’s rate setting committee voted 7-2 to keep interest rates at a 16 year high of 5.25%, but this was clearly a close call for many committee members and the minutes hint at a potential interest rate cut in August.

It is worth remembering that whilst May and June’s inflation figures may be more palatable, prices have not come down. The Consumer Price Index shows annual inflation of 9.1% for 2022 and 7.3% for 2023. The current average rate for a two-year fixed deal is 5.96%, and whilst this is lower than last year’s peak of 6.86%, many people reaching the end of their previous fixed rate will be faced with significantly higher monthly repayments in addition to other higher bills. The Bank of England have stated that around three million households will see mortgage repayments increase in the next two years. Energy prices are set to reduce in July. With less money spent on heating and lighting anyway during the summer months this will help many people, but energy prices are also predicted to rise again in the Autumn.

GDP growth has been stronger than expected for the year to date so there is room for optimism. There are still some people and businesses who are yet to experience the full impact of inflationary pressure, but the worst is probably behind us.

Economic growth has been a key political theme for parties during the election campaign with neither Labour nor Conservatives wishing to be associated with significant tax increases. The TV debates and publication of party manifestos was somewhat drowned out by the Euros, with Google searches showing far more interest in football than politics. Labour have softened their approach to pension taxation somewhat, although seem committed to adding VAT to private school fees. Sunak is trailing further tax cuts in the future, but the Tory narrative seems to be about stopping a ‘super-majority’ rather than winning the election.

European markets faced a turbulent June, with the French election causing concern. The European Central Bank issued concerns about high levels of debt in Eurozone countries like Italy, and there was even speculation earlier in June that the ECB could be required to intervene in the event of a mass sell-off of French bonds should the far-right or far-left win the election.

Germany, the region’s largest economy, saw its DAX index fall as industrial production slowed and consumer confidence waned. It’s manufacturing sector represents about one fifth of Germany’s economy and orders slowed in June amidst suspicions that China is ramping up its worldwide exports to compensate for sluggish domestic demand. However inflation fell in five key German states, suggesting a national trend.

Eurozone inflation is expected to be at 2.5% for June once the figures come out, down from 2.6% the previous month. The ECB delivered its first 25 basis points rate cut in June, with markets anticipating more easing of rates to come.

Macron has suffered with his snap election. The right wing RN party is ahead with 34% after the first round of voting with Macron calling on centrist and left wing voters to unite to see them off. A hung Parliament could be the result, which might calm investor fears of an expansionary fiscal agenda implemented in France should a populist party win a majority.

United States
Another country another election. Biden’s faltering performance in his TV debate with Trump has triggered speculation that he may be replaced as the Democrat candidate or face a likely defeat.

In a CNBC interview, Chicago Fed President Austan Goolsbee noted that May’s Consumer Price Index showed a slight decline in inflation, with headline inflation at 3.3% and core CPI at 3.4%, but both were still above the Fed’s 2% target. He went on to suggest that if inflation continues to cool and economic signs soften, the central bank might reflect on whether its monetary policy is too tight.

The US stock markets continue to be dominated by Artificial Intelligence, with the S&P 500 index and NASDAQ posted all time highs in June, but there are also signs that investors are rotating away from technology and towards other undervalued stocks such as banks and energy. The wild ride that is Nvidia fell 6.7% just after it had dethroned Microsoft as the country’s most valuable company, but it remains 140% up for the year. Whether the US infatuation with technology stocks is at an end is not yet clear but it has been the cause of much of its success for some years now, and a more equitable spread across other sectors will probably be welcomed.

The Federal Reserve maintained its hawkish stance, keeping interest rates at the same level for the seventh time in a row and suggesting fewer cuts to come than previously expected. Inflation data was encouraging but they wish to see it come down further before cutting rates. The labour market was also noted as heading in the right direction.

Far East
Asian markets had a mixed performance in June 2024, influenced by divergent economic conditions and policy responses. The Bank of Japan maintained its ultra-loose monetary policy, keeping interest rates at -0.1% and continuing its yield curve control measures. This stance has continued to support Japanese equity markets which performed well. The depreciation in the yen is also encouraging more tourism.

China’s economic data pointed to slowing growth and weak consumer demand, although there are contradictory reports on this. The Chinese government announced a series of stimulus measures, including tax cuts and increased infrastructure spending, to bolster the economy. However, concerns over the real estate sector and high debt levels weighed on investor sentiment.

Policy intervention in China is currently fairly modest but could see expansion if successful. The country appears reliant on stimulus measures to hit its growth targets and will be closely monitored by investors over the forthcoming months. Tensions with the US, and also with the EU over the growth exports of electric vehicles to Europe, could also grow over the next six months.

Emerging Markets
Emerging markets experienced a challenging June 2024. Higher interest rates in developed markets and a stronger US dollar exerted pressure on emerging economies, leading to capital outflows and currency depreciation. There is arguably an over reliance on US policy changes and the central banks of emerging market countries are likely to follow after the Fed. A cut in December rather than September would therefore slow down monetary policy normalisation in emerging markets. However low unemployment rates mean domestic demand is helping with consumption and may compensate for a slowdown in US demand.

Once again politics is playing its part.

In Mexico, the resounding electoral victory by incumbent Morena party has raised concerns over the future direction of of fiscal policy, as reflected in a surge in volatility in Mexico’s exchange rate markets. In South Africa and India the ruling parties are polling poorly and may look to make alliances to govern, which could influence economic policy.

Brazil is changing its central bank’s governor and board of directors at a time when increasing inflation is expected and interest rate hikes are being priced in by markets.

Technology stocks boosted India’s financial market performance, in anticipation of a Fed interest rate cut but this may have been assumed as September rather than December.

Political uncertainty has dominated a number of countries and whilst these moments are short lived, it is hard not to separate politics from fiscal policy. Markets rarely favour any specific brand of politics but they do like predictability and certainty. Inflation and central bank policies remained central themes, influencing market movements and investor sentiments. As we move into the second half of the year, the interplay of these factors will continue to shape the global financial landscape. There will be growing pressure on central banks to cut interest rates as inflation slows and politicians want to show economic growth.

And Finally…
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