Markets had a good week. Global equities gained around 2.6% in both local currency and sterling terms and are now some 1.5% above their high in early June. UK gilts also returned 0.9% and US Treasuries 0.5% last week and even gold regained some of its mojo, gaining 7.5%.
The US led the gains, rising 3.4% in sterling terms while Europe and Japan were both up around 2.4%, the UK gained 0.9% and emerging markets were down 0.6%. Just as the UK outperformed markedly in previous weeks benefiting from its lack of tech stocks during the tech sell-off, its gains last week were relatively muted in the face of a tech rebound. As for emerging markets, they suffered from a 5% drop in Korea which is now down 30% from its June high at the height of the exuberance over its semiconductor chip companies Samsung and SK Hynix.
So why the good performance? Particularly, as we titled last week’s commentary a fog of uncertainty and foolishly proclaimed that equity markets could continue to tread water for a while yet before resuming their gains. We highlighted three key uncertainties which had been holding markets back, so it’s worth looking at which of these really have now changed for the better.
First, there was the war with Iran. Here, equities seem to have grown more confident that we are looking at a reopening of the Strait of Hormuz sooner rather than later. This was based on optimistic comments from the US, along with Iran and Oman seemingly being close to agreeing a route for safe passage through the strait – albeit with some kind of charge being imposed.
However, equities appear to have jumped the gun a bit. As has been the case all along during the conflict, nothing is as straightforward as it first seems or the US likes to make out. Over the weekend, Iran has said it will not re-open the Strait unless the US withdraws its forces, pays compensation for war damage and lifts its sanctions. And Israel has also now rejected the Hamas disarmament deal touted by Trump’s Board of Peace.
So in truth, nothing much has really changed. Indeed, the oil market has taken a rather more circumspect view of the state of play than equities, with Brent crude this morning at $84 per barrel – little changed from a week ago. To our mind, it remains far from clear how quickly and to what extent the Strait will reopen.
The tech sector was the second source of uncertainty and again the market has cheered up with tech stocks up 5% last week. But here too, there was no big news behind the move. Instead, it seems more just a continuation of the sharp swings in sentiment seen in recent weeks.
There is no more clarity on the key question of whether the enormous AI-related capex of the so-called hyperscalers will prove worthwhile. And despite its recent bounce, the tech sector remains some 5% below its June high with chip companies, which saw the greatest gains earlier this year, still 10% below their peak.
Credit markets have certainly started to look upon the debt now being issued by the Magnificent Seven with rather more suspicion and yields on their debt have widened significantly in recent weeks. Still, we don’t believe this is a harbinger of wider problems for credit markets as the economic backdrop remains reasonably positive.
This brings us onto the only real hard bit of news last week, which were the US payroll numbers. These have been a persistent source of surprise all this year, both on the upside and downside, and Friday’s numbers were no exception, showing an unexpected drop in employment in July.
But the weakness looks exaggerated and follows unexpected strength earlier in the year. The truth of the matter is the US labour market seems to be in a state of stasis, namely low-hire and low-fire, with the unemployment rate remaining quite low at 4.1%.
Even so, these numbers did ease worries that the Fed is poised to raise rates – the third area of concern behind the recent equity pause. The inflation numbers out on Wednesday will arguably be more important but the market now believes the odds are now slightly against a rate hike in September, rather than slightly in favour as before.
While global equities now look a bit ahead of the game with the fog of uncertainty still lurking in the background, the second quarter reporting season has confirmed the underlying support being provided by corporate earnings which should fuel additional gains further out.
With close to 90% of the S&P 500 now reported, US earnings are set to be up a stonking 50% on a year earlier. Even excluding the big boost coming from the revaluation of the holdings of Alphabet and Amazon in Anthropic and SpaceX, earnings should be up around 30%. The good news has not been confined to the US with earnings in Europe (including the UK) set to grow 20% or so, helped in good part by a surge in earnings of the energy sector.
This coming week, the US inflation numbers for July on Wednesday will be the highlight. But we also have second quarter UK growth numbers out on Thursday.
This communication is designed for professional financial advisers only and is not approved for direct marketing with individual clients. These investments are not suitable for everyone, and you should obtain expert advice from a professional financial adviser. Investments are intended to be held over a medium to long term timescale, taking into account the minimum period of time designated by the risk rating of the particular fund or portfolio, although this does not provide any guarantee that your objectives will be met. Please note that the content is based on the author’s opinion and is not intended as investment advice. It remains the responsibility of the financial adviser to verify the accuracy of the information and assess whether the OEIC fund or discretionary fund management model portfolio is suitable and appropriate for their customer.
Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise, and investors may get back less than they invested.
IBOSS Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Financial Services Register Number 697866.
IBOSS Asset Management Limited is owned by Mattioli Woods Limited is registered in England and Wales at Companies House, Registered number 3140521.
Registered Office is: 2 Sceptre House, Hornbeam Square North, Harrogate, HG2 8PB. Registered in England No: 6427223.