Global markets weekly update

18.03.2024

U.S.

  • U.S major indices finished the week lower, as investors digested upside surprises in inflation data and signs of subduing consumer spending.
  • Inflation saw a sharper-than-anticipated rise in February, echoing the worrying trend witnessed in January and sending disturbing signals about the prospect of pending rate cuts. Consumer Price Index climbed 3.2% in February from a year ago and 0.4% on a month-over-month basis. In terms of Core CPI (excluding food and energy), the month-over-month change is 0.4%. The year-over-year Core CPI came in at 3.8%, exceeding the estimated 3.7%. Rents (+5.7% year-on-year) accounted for 60% of the increase.
  • Producer inflation released on Thursday appeared to cause greater concern. Indeed, the Producer Price Index rose 0.6% in February, roughly double consensus estimates and the most in six months. While core producer prices rose only 0.3%, this was also slightly more than anticipated. On a year-over-year basis, headline producer prices were up 1.6%, well above expectations and at the highest level since September. These two publications confirm that the FED will probably only cut rates 3 times by 25 bps in 2024. No rate hike is expected on Wednesday.
  • US 10-year yields climbed back to 4.3% after the inflation figures. This did not affect gold, which stabilized at $2,160.
  • Also on Thursday, the Commerce Department reported that retail sales rose 0.6% in February, but the gain missed expectations and was largely due to an increase in gasoline prices (retail sales not being adjusted for inflation). Online sales also declined 0.1%, marking a sharp deceleration from the 6.4% increase over the past 12 months.
  • US consumer sentiment remained stable in early March as attention is turning to the US presidential election. According to a preliminary March reading from the University of Michigan, the sentiment index fell slightly from 76.9 in February to 76.5

Europe

  • The Eurostoxx 600 added 0.31%, an eighth consecutive weekly gain, fueled by hopes that the ECB will start cutting interest rates in June. France’s CAC 40 Index rose 1.70%, Italy’s FTSE MIB gained 1.61%, and Germany’s DAX added 0.69%. The UK’s FTSE 100 Index advanced 0.94%.
  • The unemployment rate in the UK unexpectedly rose from 3.8% to 3.9% in the three months through January. Wage growth fell to 6.1%, the lowest level since mid-2022. Meanwhile, the UK economy showed signs that it may be recovering from a recession in the second half of 2023. GDP increased 0.2% sequentially in January.

Japan

  • Japanese stocks finished the week lower, with the Nikkei 225 Index losing 2.5% and the broader TOPIX Index down 2.1%.
  • Japan’s largest trade union, Rengo, announced higher than expected annual pay rises on Friday, already fueling hopes that the Bank of Japan could raise rates for the first time since 2007 as early as tomorrow. Rengo said its members have so far secured agreements for an average pay rise of 5.28%, a figure that far exceeds last year’s initial result of 3.8%. This news could be enough to convince the BoJ to end the world’s last negative rate on Tuesday instead of waiting until April. The BoJ has long pursued a sustainable inflation target of 2%. Almost all traders expect a rate hike tomorrow, and the market is anticipating rates of 0.25% by the end of 2024, compared with the current -0.10%. The BoJ’s ultra-accommodative policy has weighed heavily on the yen, boosting many of the country’s large-cap exporters who derive their revenues from overseas.

China

  • Despite the uncertain economic outlook, Chinese equities continued their slight ascent, as the government’s recent stimulus measures boosted investor confidence. The Shanghai Composite Index gained 0.28%, while the blue chip CSI 300 added 0.71%. Beijing set an ambitious economic growth target of around 5% this year at the National People Congress (China’s parliament, which started March 5 and ends March 11. The figure is similar to
    last year’s growth target, but tougher to meet as last year’s growth pace benefited from the post-lockdown rebound.
  • Chinese industrial production rose by 7% between January and February compared to the same period a year earlier, exceeding estimates. Growth in fixed capital investment accelerated to 4.2%, also higher than expected. Retail sales rose by 5.5%, in line with
    forecasts. These figures confirm that some parts of the economy are stabilizing. Areas of weakness persist: the urban unemployment rate rose from 5.1% in December to 5.3%, and above all the property sector also remains a major struggle for the economy, with investments down 9% and house sales down 33% in value terms. The downgrade by Moody’s for Vanke, a state-backed company, will likely further undermine confidence in China’s property sector.

Portfolio considerations

Fixed Income

Given that inflation is still in a downtrend (with a few bumps along the way) and that the labor market is showing signs of cooling, the Fed remains on track to begin its rate-cutting cycle later this year, most probably around the June meeting. Last week’s surge in bond yields, presents an opportunity for investors to increase their fixed income exposure and to increase duration by focusing on the belly of the curve (5-6y). It offers the best risk-adjusted return as it allows investors to limit reinvestment risk and to benefit from potential rate cuts in 2024, while not taking excessive duration risk by being overly exposed to the long-end.

Equities

In our view, the stock market’s sharp run higher, combined with low volatility and a rather “complacent” attitude, does make it susceptible to knee-jerk reactions in response to any disappointing data or headline. Equity markets may be due for a “healthy” period of consolidation or pullback. However, we do not see the scope for a deep or prolonged correction or bear market. This is because the backdrop remains supportive for equities: inflation may continue to moderate (although maybe not in a straight line lower), the Fed will likely start pivoting later this year, and the labor market, while it may cool from here, should remain resilient, with an unemployment rate below 4.5%. Any upcoming bout of volatility could prove to be an opportunity to diversify into segments of the market that have lagged, rebalance, and add quality names to the portfolio.

Global Markets weekly update

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