Tactical Positioning
In light of political maneuvering in the Eurozone, we have slightly reduced exposure to French sovereign debt and trimmed our euro currency exposure. Ultimately, however, we expect equity and bond markets in Europe, including the UK, to ‘muddle through’ the forthcoming elections and the independence of central banks should provide a robust backstop to any overly ambitious government spending plans.
In the US, as we discuss below, equity markets continue to make new highs with technology related stocks still leading the way. As we mentioned at the end of May, markets seem due for a pause but excitement about AI and the highly cash generative nature of several mega-cap companies (Apple, Microsoft, Nvidia, Amazon) has continued to support share prices.
Market Moves
Quelle Surprise!
With more than 2 billion voters heading to the polls globally in 2024, France ‘rejoint la fête’ with President Emmanual Macron calling a snap parliamentary election. The high stakes gamble sees his struggling centrist, ‘Renaissance’ party head to the ballot box in response to a hammering in the recent EU election, against Marine Le Pen’s far-right party, the National Rally (“RN”). With opinion polls leaning towards a victory for the RN, investors, concerned about a potentially unfunded spending spree amidst weak public finances, caused bond markets to sell off dramatically with the yield on the French 10yr treasury climbing 20 basis points to 3.22% in two days before settling at around 3.16%. French banks, which hold significant levels of government debt, fell over the fortnight, with the share prices of Soc Gen, BNP Paribas and Crédit Agricole amongst the biggest losers.
The political uncertainty also contributed to European equities enduring their worst daily performance over the past couple of months at -1.3%. The French equity market has fallen 7% over the last month, and the euro 3% against the dollar. When President Macron was asked if he would consider stepping down following an unsuccessful result, he disregarded the question saying the chance of that happening “never existed” and that the suggestion was “absurd”.
Doves and Hawks
A dovish US Consumer Price Index (“CPI”) reading on Wednesday came in lower than expected with the headline year-on-year number rising 3.3% versus a predicted rise of 3.4%, along with the ‘core’ inflation reading (which strips out food and energy prices) coming in 3.4% higher against 3.5% projected. The data showed a small move in the right direction in the battle to control persistent inflation but the rhetoric from the Federal Open Market Committee painted a less optimistic backdrop for the timing of rate cuts. The dot plot of committee member forecasts points towards only one anticipated rate cut in 2024, a far cry from the three cuts predicted by the committee earlier this year and the six cuts implied by market pricing at the start of the year. Clearly, the Federal Reserve are looking for more proof that inflation is heading towards its 2% target. Nevertheless, the data release helped US equities to reach all-time highs after the announcement.
The current rate of play
There was a plethora of monetary policy meetings over the fortnight, led by the European Central Bank which cut interest rates by 25bps to 3.75%, followed by the Bank of Canada cutting rates by the same amount, to 4.75%, whilst the People’s Bank of China and Bank of Japan opted to keep rates unchanged, as widely expected. The UK’s Monetary Policy Committee meet on 20th June and are also expected to leave rates on hold.
It pays to have a following
After a 3-year hiatus from his first live-streaming video YouTube’s “Roaring Kitty”, whose real name is Keith Gill, posted on Reddit that he’d spent $116m buying GameStop stock, along with $66m worth of options to buy more. The news initially sent the share price up 105%. Gill then seemingly sold a portion of his stock options.
Nvidia upset the Apple cart
In our last bulletin we discussed NVIDIA reaching new all-time highs following a further surge in interest in artificial intelligence. The chip-maker made headlines as its market capitalisation eclipsed $3trn, the third company ever in history to do so, and briefly overtaking fellow mega cap rival, Apple. NVIDIA’s share price is up a cool 172% this year, at the time of writing, and currently accounts for 4% of the world equity index.
Economic Updates
The weekly initial jobless claims in the US were slightly higher than forecast, at 242k versus 225k expected, indicating a slight weakening of the labour market, paving the way for a decrease in consumer spending.
The New York Fed’s Survey of Consumer Expectations, a survey which measures consumers’ expectations of economic and financial conditions, saw optimism increase, with equity prices expected to rise by 40% over the next 3 years.
In the UK, April’s unemployment figures came in higher than anticipated, at 4.4%, versus an expected reading of 4.3%.
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