Global markets weekly update

16.09.2024

U.S.

• The S&P 500 on Friday rebounded from its worst week of the year to post its best week of the year. It was also the first time since June 2022 that the benchmark index fell at least 4% in one week and then rallied more than 4% the next. Last week’s selloff had been driven by concerns over economic growth after a batch of soft data for the labor market, and historical September volatility. This week the story reversed after investors received inflation data that strengthened probabilities of a Fed interest rate
  cut next Wednesday. The only question now is, how much will be the size of the cut.
  For the week, the S&P 500 surged +4.0%, while the Nasdaq jumped +6.0%. The blue-chip Dow Jones climbed +2.6%

•  The inflation report showed that headline consumer prices rose at a 2.5% annual rate in August, down from July’s 2.9% figure and the lowest since February 2021.

• Friday’s 69.0 preliminary figure from the University of Michigan’s Consumer Sentiment Index was up slightly from the 67.9 reading in August. In addition, consumers’ expectations of inflation over the next year remained at their lowest level since December 2020.
  • Yields of U.S. government bonds extended their recent slide amid expectations of an interest-rate cut. The yield of the 10-year U.S. Treasury bond declined to the lowest level since June 2023. On Friday, the yield closed at 3.66%, down from a recent high of 4.70% in April.

Europe

• The Eurostoxx 600 gained 1.85% over the week, lifted by an interest rate cut from the ECB. Germany’s DAX rose 2.17%, France’s CAC 40 Index gained 1.54%, and Italy’s FTSE MIB added 0.83%. The UK’s FTSE 100 Index rose 1.12%.

• The ECB lowered its deposit rate for a second time this year, announcing a 25bps cut to 3.5%, in line with expectations. The decision came amid signs of weakening economic growth and slowing inflation in the eurozone. The statement accompanying the announcement emphasized that the ECB remains cautious and specified that the ECB is not “pre-committing to a particular rate path.”

Japan

• Japan’s stock markets registered mixed performance over the week, with the Nikkei 225 Index gaining 0.5% and the broader TOPIX Index down 1.0%.

• Expectations that the BoJ will raise interest rates again this year were supported by the latest comments from members of the central bank’s board. Junko Nakagawa reiterated that the degree of monetary easing will be adjusted if the outlook for Japan’s economy and inflation is realized, as the current level of real rates is extremely low.

• Despite these hawkish comments, the yield on the 10-year Japanese government bond fell to 0.84% from 0.86% at the end of the previous week—as it tracked U.S. bond yields lower on speculation that the Fed could deliver a more aggressive 50-basis-point interest rate cut at its September meeting.

•  Japan’s second-quarter GDP growth was revised lower. The economy expanded an annualized 2.9% quarter on quarter, less than the 3.1% growth initially expected. The contribution from private consumption and capital expenditure was weaker. Concerning inflation, the CPI rose 2.5% year on year in August, slowing from the previous month’s 3.0% and below consensus estimates of 2.8%.

China

• Chinese stocks declined as weak inflation data prompted concerns about a downward price-wage spiral weighing on the economy. Both the Shanghai Composite Index and the blue chip CSI 300 fell 2.23%.

• China’s CPI rose 0.6% in August from a year earlier, up from 0.5% in July, but below economists’ forecasts. Core inflation, which excludes volatile food and energy costs, increased 0.3%, slowing from July’s 0.4% rise, and marked the lowest level in over three years. Portfolio considerations

Portfolio considerations

Equities

Indexes have risen to near all-time highs, helped by a growing economy and corporate profits, lower bonds yields, and anticipations of easier Fed policy. However, we wouldn’t give the « all-clear » regarding market volatility, as the next two-month period that lead to the November election day has historically been seasonally challenging for stocks, with greater daily fluctuations and lower returns. The potential for volatility to reemerge emphasizes the importance of diversification for reducing risk and enhancing returns. We maintain our cautiousness for the time being, bearing in mind, however, that market pullbacks offer the silver lining of attractive entry points and opportunistic rebalancing. Defensive preference: healthcare; Switzerland.

Fixed Income

Bonds made a significant contribution to stabilizing portfolios at the beginning of August. A shift in focus from inflation to the jobs market and a Fed that believes monetary policy is highly restrictive and is determined to keep the economy in a soft landing, creates plentiful opportunities for fixed income. Short and long-term real yields are still looking very attractive. We still prefer intermediate maturities (5y-10y).