Financial Bulletin – June 2024

Financial Bulletin – June 2024

Key Takeaways:

Most stock markets recovered in May after faltering in April but towards the end of the month volatility began to creep higher as it became more difficult to pin down the outlook for inflation.    

Whilst the US economy was confirmed to have slowed significantly in the first quarter of the year, and other indicators also pointed to the fact that higher interest rates are beginning to have an effect, the labour market remains historically strong.

Elsewhere, although UK inflation fell to 2.3% in the year to April and is now within touching distance of the 2% target, the fall wasn’t quite as large as hoped and the likelihood of a June rate cut reduced.  

Meanwhile inflation in the Eurozone also slightly disappointed as core inflation unexpectedly accelerated. Nevertheless, after months of hints from the European Central Bank, financial markets remain convinced that interest rates will be cut in June.    

Finally the Japanese economy is estimated to have contracted at a slightly faster rate than expected in the first quarter of the year.

Over the last 6 months, the FTSE 100 returned 13.24%, the S&P 500 returned 16.11%, whilst the Euro Stoxx 50 returned 15.99%.

The Japanese Nikkei 225 returned 14.93% over the same period.

The broad emerging markets index returned 7.45% in US$ terms.

US 10 year government bond yields ended the month slightly lower, whilst gold prices were fairly stable and the price of oil fell.  

  • Chart of the month –

Nvidia is now almost as valuable as Apple:

Economic Review

May was another month of contradictory signals, particularly where the US economy is concerned. The fact that growth slowed significantly (to just 1.3% in Q1), defaults on consumer loans are rising and new home sales are falling are three of the indicators pointing to a weaker economy and lower inflation. On the other hand, the labour market is remarkably strong and producer price inflation is picking up again.    

Financial markets continued to judge that the chances of an interest rate cut this year is roughly 50-50.

The likelihood of the European Central Bank and Bank of England making several rate cuts this year is much higher, although these odds took a bit of a knock this month.

UK inflation fell by less than expected and wage growth came in a bit higher than thought. As a result, it is now thought that the Bank will make no change at the June meeting. Nevertheless, the unemployment rate rose for the third month in a row suggesting core inflation will continue to moderate.

In the Euro Area, inflation came in at 2.6% (marginally higher than the 2.5% expected) and the most up to date surveys pointed to an acceleration in growth. This makes the ECB’s decision in the first week of June a close run thing. However, after hinting at a rate cut for several months the market continues to believe the ECB will go ahead.

The Japanese economy contracted by more than expected in the first quarter, although the rebound in the second quarter of the year looks to be well underway with business surveys showing the fastest expansion for nine months. 

A background development during May was the renewed increase in the cost of shipping across the world. Since the end of the pandemic shipping costs had been steadily falling but various events, most notably attacks on commercial ships in the Red Sea, have seen them start to rise again. Since shipping costs will eventually flow through to shop prices this trend will be watched closely.    

Financial Markets and Corporate News

After a brief pullback during April most stock markets made gains during May as the economic news gave investors more certainty that interest rates are on a gradual path downwards.

In the US, the broad market was again largely dependent upon a handful of large technology companies and in particular Nvidia. Incredibly Nvidia is now close to becoming the most valuable company in the world.    

Over the last 6 months, the FTSE 100 returned 13.24%, the S&P 500 returned 16.11%, whilst the Euro Stoxx 50 returned 15.99%.

The Japanese Nikkei 225 returned 14.93% over the same period.

The broad emerging markets index returned 7.45% in US$ terms.

The US 10 year Treasury yield ended the month lower on the back of weaker economic news.

The Investment Association (IA) UK Gilts sector returned 1.05% over 6 months, whilst the IA Sterling Corporate Bond sector returned 3.51% and the IA Sterling High Yield sector returned 5.61%.

Looking Ahead

The ideal scenario for investors would be that major economies slow enough to gradually bring inflation back to target, allowing Central Banks to cut rates whilst growth remains robust enough that company earnings continue to grow.  

The worry for investors is that we are entering a period of stagflation; growth weakens whilst at the same time producer prices are kept high via higher commodity and shipping prices. 

This would mean that company earnings growth would weaken whilst the Central Bank cannot offer any relief in the form of lower interest rates.

There remains quite a stark valuation difference between US large cap companies on the one hand and Emerging Markets and the UK on the other. For US companies to justify this higher premium they must keep meeting earnings expectations.

Whilst a period of stagflation in the UK and the Eurozone is not out of the question, it is generally accepted that both the Bank of England and European Central Bank have an easier decision in cutting interest rates in the second half of this year. In both cases inflation is below 3% and the labour market is cooling.   

On top of the domestic situation in developed markets the influence of China only adds to the uncertainty. President Xi seems to be intent on trying to expand their manufacturing exports further. A large ramp-up in lower cost Chinese goods could result in a similar situation to the early 2000s when inflation across the developed world was low and consistent. Conversely, if Xi’s plan results in tariffs and trade wars then there is likely to be more volatility.