Global markets weekly update

25.03.2024

U.S.

  • Stocks moved higher for the week, pushing the S&P 500 Index and the Nasdaq Composite to new records, as investors welcomed the dovish news that Federal Reserve policymakers were still anticipating three interest rate cuts later in the year. And underneath the surface, the gains were also driven by a broader set of sectors beyond technology. These included cyclical sectors like financials, energy, and industrials.
  • As was widely anticipated, the Fed left interest rates steady at 5.25%-5.5%, and the so-called dot plot showed that policymakers stuck with their early median expectation for three rate cuts in 2024.
  • Amid a slight pullback in historically high mortgage rates, U.S. sales of existing homes in February posted the biggest monthly gain in a year, jumping 9.5%. The news arguably supports hopes that the economy is continuing to expand without inducing inflation pressures.
  • The Fed also took the opportunity to upgrade its economic growth outlook for 2024 – 2026. The Fed’s new forecast points to GDP growth of 2.1% in 2024, followed by 2.0% growth rates in 2025 and 2026. As Powell noted during the press conference: « The economy is strong, the labor market is strong, and inflation has come way down. » The Fed also foresees the unemployment rate moving slightly higher to 4.0% in 2024, up slightly from 3.9% currently.

Europe

  • The Eurostoxx 600 ended the weeky near a record high, climibing 1.03%. Dovish signals from central banks boosted risk-on sentiment. Germany’s DAX gained 1.58%, while Italy’s FTSE MIB advanced 1.30%. France’s CAC 40 Index, however, fell 0.17%. The UK’s FTSE 100 surged 2.70%.
  • The BoE kept its key interest rate unchanged at 5.25% for a fifth consecutive time. Governor Andrew Bailey said: “We are not yet at the point where we can cut interest rates, but things are moving in the right direction”, insinuating rate cuts could be “in play” at future meetings.
  • The BoE’s decision came a day after data showed annual consumer price growth decelerated to 3.4% on February from 4% in January, the lowest inflation reading in more than two years.
  • The SNB surprised the market by cutting interest rates to 1.5%. The SNB said that it aimed to address lower inflationary pressure and an appreciation of the Swiss franc. Another rate cut is expcted in June and a final one in September.
  • Eurozone Composite PMI ticked up from 49.2 to 49.9, a 9-month high.

Japan

  • Japanese stocks gained over the week with the Nikkei 225 rising 5.6% and the broader TOPIX Index up 5.3%.
  • The Bank of Japan ended negative interest rates, its cap on 10-year government bond yields, as well as ETF and real estate investment trust (REIT) purchases.
  •  Last week Japan’s largest trade union, Rengo, announced higher than expected annual pay rises, stating its members had 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%. 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. • CPI rose to a higher-than-expected 2.8% annualized over the month of February, a sharp increase from January’s 2.0% and well ahead of the BoJ’s inflation target.

China

  • Chinese equities retreated as concerns about the property sector slump counterweighed optimism about better-than-expected economic data. The Shanghai Composite Index dropped 0.22%, while the blue chip CSI 300 gave up 0.70%.
  • Industrial production rose an above-forecast 7% in January and February from a year earlier, up from December’s 6.8%. Fixed-asset investment grew 4.2% in the first two months of the year from the prior-year period, rising from 3% in December amid higher infrastructure growth. Retail sales rose more than expected over the two-month period as consumption surged during the weeklong Lunar New Year holiday. The urban unemployment rate was 5.3%, while the youth jobless rate went up to 15.3%.

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 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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