Quarter 2, 2024 Market Commentary

• Published on July 4th, 2024

Quarter 2, 2024 Market Commentary

Past performance is not indicative of future results. The information mentioned is for illustrative purposes and should not be considered a recommendation to buy or sell.

Global shares experienced gains in the quarter, with developed markets, particularly the US, leading the advance, while emerging market stocks lagged. Enthusiasm for AI boosted technology stocks. Despite major central banks raising interest rates, the US Federal Reserve paused rate hikes in June. Government bond yields rose, indicating a drop in prices.

Note: Past performance is not indicative of future results. The sectors, securities, regions, and countries mentioned are for illustrative purposes and should not be considered a recommendation to buy or sell.

US

US equities ended the quarter higher, with most gains occurring in June. This was due to moderating inflation and indications of a resilient US economy despite higher interest rates. A revision to Q1 GDP growth showed a 2% annualized expansion, up from the previous 1.3%.

The Federal Reserve raised interest rates by 25 basis points in May but paused in June, a move termed a “hawkish pause” by economists. The “dot plot” indicated two more rate hikes in 2024.

US inflation, as measured by CPI, fell to 0.1% month-on-month in May from 0.4% in April, driven by a continued decline in energy costs, bringing the annual rate to 4.0%, below expectations. The US unemployment rate increased to 3.7% in May from 3.4%, still indicating a tight labor market.

Despite initial investor caution regarding the US debt ceiling, Congress suspended it in early June with spending concessions that likely won't impact economic growth significantly.

The IT sector led the stock market advance, driven by AI excitement, particularly among chipmakers. Strong performances were also seen in consumer discretionary and communication services sectors, while energy and utilities lagged.

Eurozone

Eurozone shares posted gains in Q2, led by financials and IT sectors, while energy and communication services underperformed. Semiconductor stocks boosted the IT sector due to positive sales projections from US chipmakers and potential export reductions to China announced by the Dutch government. Financials, especially banks, outperformed due to strong near-term earnings expectations.

The European Central Bank raised interest rates twice, reaching a refinancing rate of 4.0%. Annual inflation fell to 5.5% in June from 6.1% in May, while core inflation rose slightly to 5.4%.

The eurozone faced a mild recession over the winter, with GDP declines of -0.1% in both Q4 2022 and Q1 2023. Forward-looking data pointed to slowing economic momentum, with the composite PMI falling to 50.3 in June from 52.8 in May, nearing stagnation.

UK

UK equities fell over the quarter, with large diversified energy and basic materials groups being significant detractors due to weak commodity prices and concerns about China's economic outlook. Sterling strength also negatively impacted sectors with significant US dollar earnings.

Domestic market areas underperformed as the Bank of England raised rates twice, including a 0.5 percentage point increase in June after slowing the pace to 0.25 points in March. Strong UK jobs market data, wage growth, and core inflation readings prompted the rate hikes, leading to a sell-off in UK gilts.

Higher gilt yields affected the domestic economy by influencing fixed-rate mortgage pricing. Questions about the UK inflation outlook pushed swap rates to levels seen during the "mini Budget" crisis of autumn 2022, impacting housebuilders negatively. However, following the June rate hike, longer-dated gilt yields fell, suggesting investor confidence in the BoE’s inflation control, despite recession risks.

Japan

Japanese shares continued their strong momentum, with the TOIPX Total Return index rising by 14.4% in local terms for Q2. The yen weakened, reaching 188 yen against sterling and 144 yen against the US dollar, which negatively impacted foreign currency-denominated returns. The market hit a 33-year high, partly driven by foreign investors, expectations of corporate governance reforms, and structural economic shifts. Despite fair valuations, there is potential for upward earnings revisions supported by yen weakness.

The Bank of Japan maintained its dovish stance under new governor Kazuo Ueda, holding policy steady in April and June. Continued US interest rate hikes accelerated yen weakness, although solid macroeconomic figures suggested progress.

Asia (ex Japan)

Asia ex Japan equities recorded a negative performance, with China, Malaysia, and Thailand underperforming, while India, South Korea, and Taiwan saw gains. Chinese equities fell as the post-COVID economic rebound cooled, with slowing factory output and weak consumer spending. Hong Kong shares were also affected.

India experienced strong gains due to foreign inflows and encouraging economic data. Taiwan and South Korea advanced, driven by AI-related technology stocks. The Philippines and Singapore ended the quarter negatively, while Indonesia saw modest gains.

Emerging Markets

Emerging market equities delivered modest gains, lagging behind developed markets. US-China tensions and concerns over China’s economic recovery contributed to underperformance. Hungary, Poland, and Greece were top performers, with Central European markets anticipating rate cuts and Hungary cutting rates in June. Greece’s ruling party's election victory signaled market-friendly policies.

Brazil performed well amid easing fiscal concerns and optimism about rate cuts. Improved macroeconomic data and ongoing accommodative monetary policy supported gains in India. Colombia, UAE, Peru, Saudi Arabia, and Mexico also saw gains, while Korea and Taiwan outperformed on AI growth optimism.

China underperformed due to recovery concerns. Kuwait, Qatar, and South Africa lagged, with Turkey posting the largest loss due to President Erdogan's re-election.

Global Bonds

Q2 2024 saw a drop in market volatility, with rising government bond yields. The UK and Australia underperformed due to high inflation and strong central bank responses. Most major central banks raised interest rates, except for the BoJ. The Fed paused in June, keeping rates at 5% to 5.25%.

Corporate balance sheets remained strong despite an increase in default rates. Global high yield bonds outperformed investment grade as recession fears eased. US growth exceeded expectations, with a ‘soft landing’ scenario gaining consensus. US high yield bonds posted positive returns, and Treasury yields increased, further inverting the curve.

The ECB continued raising rates and announced the end of Asset Purchase Programme reinvestments in July 2023. Germany’s 10-year yield increased, with Euro high yield outperforming investment grade.

UK inflation surprised, prompting the BoE to raise rates by 50 basis points in June. UK 10-year and two-year yields rose significantly, with UK high yield outperforming investment grade.

Improved global growth sentiment led to weaker performance for lower-yielding currencies like the yen, while sterling performed best due to higher rates.

Convertible bonds returned 5% in Q2, benefiting from strong performance in tech stocks driven by the AI narrative. However, the convertible universe lacks major tech names, limiting participation in gains. The primary market was active, with $22 billion in new convertibles.

Commodities

The S&P GSCI Index saw a negative performance in Q2. Industrial metals and energy were the worst-performing sectors, while livestock prices rose. Within industrial metals, zinc, nickel, and aluminum prices dropped sharply. Energy prices for crude oil, Brent crude, heating oil, and gas oil declined, while natural gas and unleaded gasoline saw modest gains.

In agriculture, higher cocoa and soybean prices couldn't offset declines in coffee, sugar, and corn. Wheat and Kansas wheat ended positively. Precious metals, including gold and silver, ended the quarter negatively.

Digital Assets

Bitcoin returned 6.9% in Q2, while Ethereum lagged slightly at 6.0%. Year-to-date, Bitcoin and Ethereum returned 84.3% and 61.6%, respectively. Regulation continues to dominate the digital assets narrative, with the EU adopting the MiCA framework for investor and consumer protection. In the US, various bills are being legislated to clarify digital assets' status, primarily as commodities. SEC actions against Coinbase impacted the market, particularly altcoins mentioned in the lawsuits.

Large asset managers filed for US spot Bitcoin ETFs, pending regulatory approval. This, along with SEC lawsuits, supported Bitcoin's outperformance over altcoins this year.