Market Update | Week 15

IBOSS Weekly Market Update | April 8, 2024

Global equities fell back a little last week, posting declines of 0.5-1% in both local currency and sterling terms. The only regions to see small gains were Asia and Emerging markets, while the only sectors to see a rise were energy and basic materials.

Government bonds also had a negative week with Gilts and Treasuries down 1% or so on the back of a renewed rise in yields. By contrast, commodities had a strong week. Gold was up as much as 5% and broke above $2300/oz, while crude oil prices climbed 2% and tested $90/bbl for the first time since October.

There were three main factors behind this confluence of moves: heightened geopolitical tensions, fading hopes for US rate cuts and strong economic data.

Fears that Iran could be more overtly drawn into the Israel-Hamas conflict increased on the back of the Israeli bombing of the Iranian embassy in Syria. Still, although oil prices are now well up on the levels below $80 seen in recent months, they remain below their high just prior to the Hamas attack on 7 October.

The uncomfortable fact remains that the market continues to be largely unmoved by the terrible events in the Middle East. Although the risk of a serious escalation of the conflict can far from be dismissed out of hand, markets will most likely – aside from the odd wobble – remain largely impervious to events in the Middle East. This is after all their usual cold-hearted reaction to most traumatic geopolitical events.

Interest rates, however, should remain very much centre stage in driving market developments. Hopes for US rate cuts later this year have continued to dwindle. Investors are doubting whether the Fed will start lowering rates as soon as June and fear the three cuts forecast by year-end by the Fed in March may now not materialise.

These worries have in part been inflamed by hawkish comments from some Fed officials. Although importantly, Chair Powell has not really changed his tune. Namely, rate cuts are still likely later this year but are data dependent and will require further progress on the inflation front.

The slight problem here is that US inflation has ticked up again in the last couple of months and remains some way above the Fed’s 2% target. Wednesday’s consumer price numbers will accordingly be a big focus and are projected to show the headline rate edging higher to 3.4% but the more important core rate edging down to 3.7%.

The other reason for doubts creeping in over Fed easing is the continued strength of the economy which was confirmed by last week’s crop of data. Payrolls posted a considerably larger than expected increase in March, seemingly showing that the labour market remains in rude health.

In addition, US manufacturing business confidence moved into expansionary territory for the first time in eighteen months. If the economy is doing just fine with rates where they are, it rather begs the question of why the Fed needs to ease.

Global manufacturing confidence is also back in positive territory, helped not only by an improvement in the US but also in China. The better news on the economy – along with the burst of AI-led enthusiasm – is a major reason why equities have managed to post significant gains this year despite hopes being scaled back from as many as seven US rate cuts this year to little more than two.

But at the end of the day, economic activity is only important for equities in so much as it feeds through to corporate earnings. The first quarter reporting season kicks off on Friday in the US with the big banks. The expectation is that earnings will be up 5% on a year earlier, rather less than the 10% gain seen the previous quarter. However, as is the norm and the case recently, earnings will very likely end up beating forecasts which have been guided down by companies, so they can then report a positive ‘surprise’.

While US events will be centre stage this week, the ECB meeting on Thursday will not go unnoticed. Policy will almost certainly be kept unchanged with the focus on whether it backs up expectations that rates will start to be cut in June.

Contrary to what was expected a few months ago, the prospect is now for rates to fall a bit sooner and faster in the Eurozone than in the US. Growth is much weaker and more in need of support and inflation is also lower. Last week saw both the headline and core rates fall more than expected to 2.4% and 2.9% respectively.


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