SUMMARY
Geopolitics dominated the news narrative last week with imminent elections in France and the UK.
The first presidential debate in the US was held on Thursday, sponsored by #CNN, with incumbent President #Biden at times looking frail and confused, heightening concerns with his electability.
The major economic news last week was May PCE (US) released on Friday, which was in line with expectations.
Markets were generally lacklustre, with most equity indices lower on the week. US Treasury yields rose, most pronounced at the intermediate and long end of the curve. Gold and oil prices were slightly higher on the week, with the Japanese Yen and Bitcoin lower.
MARKETS LAST WEEK
Last week marked the end of the second quarter and the first half of 2024.
Global stock indices were positive in the first half of the year, with the exception of Chinese equities which were slightly lower following disappointing performance in the second quarter. Japanese stocks were also negative in the second quarter, but not enough to offset the strong gains in the first quarter. Both UK and European stocks delivered positive performance in the first half. Japanese stocks have had the best performance YtD (+18.3%), followed by US stocks (S&P 500 +14.5%).
The tech-skewed NASDAQ Composite continued to sizzle, leading the performance of US indices in 1H24 (+18.1% YtD). As the press has reported repeatedly, large tech companies continue to drive the tech-heavier indices higher, with speculation increasing that broadening of the rally must eventually occur.
UST yields were higher across the curve in the first half of the year, with the yield curve (2y-10y) remaining inverted to exactly the same degree it was at the end of 2023 (-35bps). UST total return indices are in the red this year.
Corporate credit spreads were tighter in the first half of 2024 both in investment grade and high yield.
Gold and oil pushed higher in 1H24. The US Dollar continued to grind higher, while Yen continued to lose ground. Bitcoin was down 13.7% in the second quarter, but remains the star performer YtD, up a sharp 43.3%.
WHAT DROVE MARKETS LAST WEEK
Geopolitics continue to dominate the news flow, with imminent elections set for France and the U.K. in the coming days. Also, the first presidential debate in the US between incumbent President Joe Biden and challenger and former president Donald Trump was on Thursday, with Biden looking and sounding very much his age plus more. What a poor choice Americans face this November for “the leader of the free world” (assuming that Trump and Biden eventually secure their party nominations). On Friday, US markets had a muted reaction following the debate, perhaps signalling that neither candidate even touched on the elephant in the room – rapidly increasing US deficits and national debt.
French election
It is clear that the sentiment in the European Union is shifting right, with the newest data point in this respect the progression of Marine Le Pin’s National Rally party. The National Rally party seems almost certain to get the largest percentage of votes in the first round of France’s snap Parliamentary elections scheduled for today, with a coalition of left-leaning parties (New Popular Front) likely to come in second, freezing out President Macron’s party for the run-off election next Sunday. In many respects, the politics of France specifically and the EU more broadly mimic those of the US, in that right leaning parties are gaining ground. These parties tend to favour nationalist policies and are anti-immigration. Similarly in the US, Trump’s “MAGA” theme leans into “US first” policies on things like trade, and is staunch anti-immigration, too.
UK election
In the UK, the snap election is set for July 4th. Even if centre-left Labour gains the majority in Parliament as polls suggest, the UK arguably had its “shift to the right” moment in the run-up to the BREXIT referendum in 2016, in which similar themes (national interests over the EU and anti-immigration) drove the UK electorate to vote to leave the EU. The UK shift to the centre-left in this election, in contrast to current slow shifts the other way in the US and EU, reflects fatigue with the incumbent Conservative Party, which has had opportunities to provide competent leadership but has slipped on more than one banana skin in the last few years.
Investor reaction, geopolitics
Although geopolitical risk remains front & centre, the likely outcome of the UK and French elections seems largely factored in at this point. There continues to be more uncertainty in the US election, which is further out. However, it is hard to distinguish between the economic policies of the two candidates for US President, both of which seem completely unwilling to address US deficits with one or both suggesting further (or an extension of) tax cuts and / or increasing government expenditures. As the candidates get pinned down on their economic plans (and assuming they are truthful) as the election cycle continues, perhaps there will be a more definitive investor reaction.
Economic data
As far as economic data last week, investors continue to carefully look for signs that the Fed might begin its easing cycle earlier than expected. May’s PCE data released Friday morning before the open (BEA news release here) was encouraging in this respect, with May MoM headline PCE flat and core PCE increasing only 0.1%. The data was in line with expectations and was the best read since early 2021.
The data suggests that the Fed’s preferred measure of inflation is heading in the right direction. Bond investors initially reacted favourably, but sentiment seemed to shift mid-morning on Friday with investors being reminded that tight monetary policy still has a ways to run, a mantra emphasised repeatedly by Fed officials. Also, the fact that neither Mr Biden nor Mr Trump would touch deficit reduction during the debate, which will inevitably need to include some combination of tax increases and expenditure reductions, might have had a bearing on the bond market, since yield increases were most pronounced at the intermediate and long end of the curve even though PCE data was in line.
Although “a day late and a dollar short” for current PM Rishi Sunak and the Conservatives, UK GDP for the 1Q24 was revised up to 0.7% (from first estimate 0.6%), and April GDP is expected to be flat (data here). This is good news for the UK, which apparently had the best growth in the 1Q24 of its G7 peers.
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