Global equities last week continued their recent choppy performance, with a gain of 1.8% in local currency terms reversing a fall of the same magnitude the previous week. In sterling terms, a strengthening of the pound reduced last week’s increase to 0.8%.
Europe, the UK and Japan led the gains, rising 2.0%, 1.7% and 1.4% respectively in sterling terms while the US and emerging markets lagged, with the former up 0.5% and the latter down 0.2%. As has been the case for much of the year, the fortunes of the tech sector were a major factor driving the disparities in regional performance.
The last few weeks have been characterised by increased volatility within the tech sector as worries have started to emerge over the sustainability of the surge in earnings behind this year’s stunning performance of the semiconductor chip companies.
The US chip company Micron Technology – yet another tech company with a market capitalisation now over $1tn – fell 14% last week despite releasing stellar results only a few days earlier. This, however, still left the stock up 240% year-to-date.
In another sign of the rotations underway within tech as the market continues to seek out both the latest AI hot story and the ultimate AI winners and losers, the Magnificent Seven – which have fallen out of favour this year big time – staged a bit of a come-back last week. They were up 5.5% even while the US chip sector was down 4.5%. But this still leaves the Magnificent Seven down 1% this year – a far cry from the 20% gain in the tech sector overall.
The prospect for corporate earnings remains key not just for the tech sector but also the market overall. The reason why global equities have managed to return as much as 12.6% in both local currency and sterling terms so far this year, with only half the year gone and despite a major energy shock, is earnings.
Global earnings are forecast to rise more than 20% over the coming year. This growth has been driven largely by tech, provided a major tailwind to markets and should continue to drive them higher, more than offsetting any drag from high valuations. So, all good for now but this does leave markets hostage to any disappointment on this front down the road.
Meanwhile, on the macro front, the US payroll numbers managed to surprise once again – this time on the downside, having surprised on the upside last month. Employment did rise in June but the strengthening of the labour market this year now looks rather less impressive than before.
Still, the market continues to believe the Fed will raise rates by 0.25% later in the year in response both to inflation running well above target – even though the retreat in energy prices clearly reduces worries on this front- and the resilience of the economy.
Eurozone inflation also surprised on the downside last week. The headline rate fell back to 2.8% in June from an energy-related high of 3.2% in May, while the core rate eased to 2.4% from 2.6%. But, as with the Fed, expectations linger that the ECB will raise rates later this year, even though it already did so in June unlike the Fed or BOE.
It is a similar story for UK rates with the market continuing to believe they could be nudged up 0.25% to 4.00% late this year. If the Strait of Hormuz continues to reopen gradually and energy prices hold onto their recent drop, these various rate hikes may well end up not materialising.
But the attention last week in the UK was focused very much on the goings on in Manchester and Mexico City. In his big policy speech last Monday, Andy Burnham’s emphasis was on devolution, increased state intervention particularly for the utilities, more social housing, reindustrialisation and increased opportunities for young people.
With most of these initiatives, the consensus is that they generally make sense but the devil will be in the detail of the implementation and any resulting boost to growth will take some time to materialise. Of more immediate interest to the gilt market is who Burnham will choose as Chancellor and on this subject he remains tight-lipped.
Talk of fiscal black holes also re-emerged briefly last week with the long-awaited release of the Defence Investment Plan which boosts defence spending by £15bn over the next four years. £5bn of this is as yet unfunded.
But in truth, this hole is miniscule in the grand scheme of things, representing only 0.1% of total government spending. It is also small beer compared to the £24bn headroom the government currently has against the fiscal rules – the relevant comparison here being the annual £1.2bn shortfall rather than the four-year total.
As for last night’s events, let’s just say I’m rather regretting succumbing to the wave of pessimism ahead of the event and putting my sleep needs before my country.
All this left government bond yields edging higher last week both sides of the pond and small losses for US Treasuries and UK gilts of 0.6% and 0.3% respectively.
This week is a quiet one on the macro front with most attention likely to focus on the minutes of the recent Fed meeting, it being the first one with Kevin Warsh as Chair.
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