Equity markets in the US, Asia-Pacific and emerging markets made positive progress in June. However, Chinese equities retreated as the country's property woes continued. The European Central Bank (ECB) announced an interest rate cut, while the announcement of a snap election in France increased volatility in Europe's bond and equity markets. Political uncertainty also increased in the US, with questions about Joe Biden's future. In the macroeconomic arena, inflation continues to ease in many countries and the economic slowdown expected by many is taking longer than anticipated to arrive.
UK
Inflation falls to target
At its June meeting, the Bank of England (BoE) held interest rates at 5.25%, leaving them unchanged since last August. Consumer Prices Index (CPI) inflation fell to the BOE's 2% target during the month, but services inflation remains elevated. Interest rate cuts are on the horizon, although services inflation, wage growth and the labour market all continue to be closely watched. After the month end, a Labour government was elected with a large majority. This result was widely expected and many investors are hoping it will herald a new period of political and economic stability.
US
Slowing down... but gradually
The US economy continues to edge towards a slowdown, although the process is a gradual one because data is mixed. While some data indicates slowing economic growth, other figures are slightly more positive than expected.
Gross domestic product (GDP) growth data was better than anticipated – with the figure for the first quarter revised up from 1.3% to 1.4%. Non-residential and residential investment - two measures of spending – were also revised up, while consumer spending was revised down.
The Federal Reserve's preferred measure of inflation, Personal Consumer Expenditure (PCE), was, as expected, unchanged on the previous month and up 2.6% over 12 months. This signalled that consumers may be changing their habits and could open the door for a rate cut in September.
Europe
The first cut...
After holding rates steady for nine months, the ECB announced a 0.25% cut in June. The bank's President, Christine Lagarde, was keen to stress that further cuts would depend on the data. Inflation has fallen significantly from its peak, but wage growth remains elevated, so further rate cuts are likely to be gradual. French President Emmanuel Macron announced a snap election, following a poor showing in elections for the European Parliament, and this increased political uncertainty, triggering volatility in equity and bond markets.
Japan
Equities flat as economy shrinks
Japanese equity returns were flat in June in sterling terms and the yen continued to weaken against the US dollar. Inflation had fallen for three months, but the trend reversed in May and prices rose 2.8% after the government ended electricity subsidies. GDP data for the first quarter was revised downwards from -1.9% to -2.9%.
Asia and Emerging Markets
Chinese equities decline as property price fall
Asian and emerging market equities remain a long way off their highs of 2021, largely due to China's poor performance.
However, Indian equities continue to perform strongly and are up 17% year to date and the BJP's election victory should enable Prime Minister Narendra Modi to continue with his business- friendly policies. Election results in Mexico have been less favourably received by the market, with concerns that new President Claudia Sheinbaum will introduce more radical policies that move away from her predecessor's relatively conservative fiscal approach. Mexican equities are down 12% since she took office on 2nd June.
In China, the stock market has resumed its decline, as the ailing property market shows no sign of recovery, despite the government's hefty stimulus package. Prices of new homes fell at the fastest rate in 10 years in May, and millions of newly built properties lie empty after years of excessive construction.
Fixed Income
French election provokes uncertainty
Against a backdrop of economic uncertainty, European politics were front and centre in the minds of investors in June, with the potential for far right and far left parties to wield much greater power in France causing considerable disquiet. This also sharpened investors' focus on the country's weak growth and high debt.
The difference in the yields* paid by French government bonds and what are perceived as safer German government bonds widened to levels not seen since the Eurozone crisis of 2011-12 and the spreads** between corporate and government bonds in France followed suit. Contagion was witnessed across the region, with the spreads on Italian debt leading the way, given the country's even larger public debt burden.
While US and UK corporate bonds were mildly affected, investor sentiment towards both nations was not impacted to any material extent.
* Yield: Yield is the income from an investment, usually stated as a percentage of the value of the investment.
** Spread: The spread (or yield spread) is the difference in yields paid by different bonds. Typically, bonds with a higher perceived risk are required to pay a greater yield by investors and this is reflected in a wider spread over bonds perceived to be lower risk.
1 month performance
3 month performance
12 month performance
Market Round Up
Source: Morningstar Direct
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