City thinking, local knowledge

July Market Commentary

By Questa

June 2024 was a significant month for global financial markets, marked by notable volatility and key economic developments. The interplay of geopolitical tensions, economic data releases, and central bank policies shaped market sentiments across various regions. Here’s a breakdown of the key events and their potential implications.

UK

As we now know, Rishi Sunak’s gamble on an early, snap election hasn’t paid off. His campaign faltered amidst scandals and competition from Reform. Despite some positive economic news, the political landscape remains turbulent.

Inflation and Interest Rates

Inflation slowed to 2% in May, aligning with the Bank of England’s target. However, some prices continued to rise unexpectedly. The Bank’s rate-setting committee narrowly voted (7-2) to maintain interest rates at a 16-year high of 5.25%, hinting at a potential cut in August.

Despite recent inflation figures being more manageable, prices have not decreased. The Consumer Price Index shows annual inflation of 9.1% for 2022 and 7.3% for 2023. Many households face significantly higher mortgage repayments as fixed-rate deals end, compounded by rising living costs.

Energy prices are set to decrease this month, offering temporary relief, but are expected to rise again in the autumn.

Economic Growth and Political Climate

GDP growth has been more substantial than expected, providing some optimism. However, some individuals and businesses have yet to feel the full impact of inflationary pressures.

The election campaign has seen economic growth as a central theme, with both Labour and Conservatives avoiding significant tax increases. Labour softened its stance on pension taxation, while Sunak hinted at future tax cuts, though his focus seems to be on preventing a ‘super-majority’ rather than winning outright.

Europe

French Elections and Market Reactions

European markets experienced turbulence, partly due to the French election. Concerns about high debt levels in Eurozone countries like Italy and potential ECB intervention in case of a French bond sell-off added to the uncertainty.

Germany’s Economic Slowdown

Germany, the region’s largest economy, saw its DAX index fall as industrial production slowed and consumer confidence waned. Despite inflation falling in five key states, suggesting a national trend, concerns about China’s increased exports affecting German manufacturing added to market jitters.

ECB Rate Cut and Economic Outlook

The ECB delivered its first 25 basis points rate cut in June, with more easing anticipated. Eurozone inflation is expected to be 2.5% for June, slightly down from the previous month.

United States

Political Uncertainty and Economic Indicators

Biden’s underwhelming debate performance with Trump has triggered speculation about his candidacy. Economic indicators showed a slight decline in inflation, with headline inflation at 3.3% and core CPI at 3.4%.

The Federal Reserve maintained its hawkish stance, keeping interest rates unchanged for the seventh consecutive time, with fewer cuts expected in the near term.

Market Movements and Sector Rotation

US stock markets, driven by the AI sector, saw the S&P 500 and NASDAQ hit all-time highs. However, there are signs of a shift towards undervalued stocks such as banks and energy. Nvidia’s significant rise and subsequent fall highlight the volatility in the tech sector.

Far East

Japan’s Monetary Policy and Market Performance

The Bank of Japan maintained its ultra-loose monetary policy, supporting Japanese equity markets. The yen’s depreciation has encouraged tourism, bolstering economic activity.

China’s Economic Challenges

China faced slowing growth and weak consumer demand, prompting the government to introduce stimulus measures. Concerns about the real estate sector and high debt levels weighed on investor sentiment. Ongoing tensions with the US and the EU over exports could further impact economic stability.

Emerging Markets

Impact of US Policy and Domestic Demand

Emerging markets faced challenges due to higher interest rates in developed markets and a stronger US dollar. Capital outflows and currency depreciation were significant issues. However, low unemployment rates in emerging markets are helping to sustain domestic demand, potentially offsetting slower US demand.

Political Influences

Political events, such as Mexico’s electoral outcome and potential changes in leadership in South Africa and India, added to market volatility. Brazil’s change in its central bank’s leadership amidst rising inflation expectations further highlighted the political-economic interplay.

Conclusion

Political uncertainty remains a dominant theme across many regions, influencing fiscal policies and market sentiments. Markets prefer predictability and certainty, and as we move into the second half of the year, the pressure on central banks to cut interest rates will likely increase as inflation slows. Investors should stay vigilant and adaptable to navigate the evolving global financial landscape.

Sources

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