June Commentary
GLOBAL MARKETS
The dominant theme affecting global markets was the potential divergence in monetary policy between major central banks, particularly the ECB and the Fed, impacting bond yields and currency values.
US MARKETS
Continue to move higher as interest rates hold firm
The S&P 500 surged by 4.8%, and bond prices also rose. Notably, the IT and Utilities sectors led the way, with IT up 9.95%. However, Energy and Consumer Discretionary sectors underperformed, with Energy declining by 0.97%. The Federal Reserve held interest rates steady at 5.25-5.50% when they met at the end of April/early May, citing persistent inflationary pressures and mixed economic data. Despite a weak jobs report and a downward revision to Q1 GDP growth of 1.3%, corporate earnings generally exceeded expectations, providing support to the stock market.
Up 4.8% (US 500)
UK MARKETS
Mid and small caps help to deliver steady gains overall
The FTSE 100 made steady gains, achieving a 1.6% gain (2.1% total return), with mid and small caps leading the charge. Meanwhile, the FTSE 250 delivered a 4.2% return, and Small Cap ex-IT outperformed, rising by 6.7%. Across the market, the FTSE 350 Construction & Materials Index (6.5%) and the FTSE 350 Aerospace & Defence Index (6.5%) delivered the strongest returns, while the FTSE 350 Beverages Index (-4.1%) and the FTSE 350 Oil & Gas Producers Index (-2.9%) underperformed.
Up 2.0% (UK All Share)
EUROPEAN MARKETS
Financials and telecommunications lead the way
European stocks experienced mixed performance despite the Stoxx 600 ex-UK index increasing by 2.8% in euro terms, and hitting an all-time high mid-month. There were notable gains in the Financial Services and Telecommunications sectors, which rose by 6.9% and 5.6% respectively. However, the Travel and Leisure and Automobiles sectors underperformed, declining by 4.0% and 2.8% in euro terms. Year to date, the strongest returns have come from the Banking sector (+20.1%) while the Utilities and Food & Beverages sectors have struggled, with declines of 2.8% and 2.2% respectively. Long-duration Bund prices fell by 1.0%.
Up 2.8% (Euro 600 Index ex UK)
JAPAN MARKETS
Mixed performance for the month
The Japanese stock market produced a small positive return. The Nikkei 225 rose slightly, 0.2% in local currency terms, losing a little ground in sterling terms. The more broad based Japanese TOPIX outperformed the Nikkei 225 over the month. Long-duration Japanese government bond prices fell by 3.5%, despite inflation ticking down to 2.5% at the headline level and 2.2% Core. Growth stocks outperformed value stocks, and large-cap stocks continued to outperform small-cap stocks. Sector-wise, the Japanese Utilities sector showed ongoing strength, while the Consumer Discretionary sector underperformed.
Up 1.1% (Japan Index)
Key Points
• The Bank of England’s decision not to cut interest rates in early May supported a rally in the pound, with sterling gaining nearly 3cts against the dollar in the ensuing fortnight.
• Interest rate expectations continued to cause gyrations in currency markets. Higher-for-longer rates in the US, and expected cuts in Europe, should be supportive of the dollar, but the growth implications appear to be boosting the euro and pound.
• The Japanese authorities intervened in the foreign exchange market twice (end of April and early May), spending over Y9trn ($60bn) to support the yen. Despite these efforts, gains subsequently reversed and the yen declined further.
• The lower yielding currencies, the Japanese yen and Swiss franc, continue to feel the pressure from higher-for-longer interest rates elsewhere. Lower European rates may ease that pressure..
Key Points
• In local currency terms, developed sovereign bonds outperformed, while in the credit space, investment grade corporates were slightly ahead of high yield.
• Index-linked debt performed strongly, both in the UK and globally, outperforming conventional government bonds.
• In the developed world, despite rate cut hopes, longer-dated European debt was marginally the weakest, yields rose very modestly over the month, eating gently into the positive total returns.
• EM debt struggled, with rates in Mexico and Brazil moving higher in the run up to Mexico’s presidential election, while South African bond yields were relatively flat through May despite their close election.
• Yield curves moved in different directions, reflecting local rate expectations. The European curve tended to steepen a little, and the US curve inverted marginally further, as 1yr and 2yr debt lagged longer dated bonds.