Investment environment overview 06/2024

June was hardly a month of surprises for the U.S. stock market – the Fed acted predictably, indices were habitually moving upwards, and the technology sector was traditionally outperforming its peers. The S&P 500 was up 3.5%, while Nasdaq-100 added 6.2%. “Magnificent Seven” had, of course, a good month too, with Alphabet adding 5.2%, Meta growing by 5.6%, Nvidia by 7.4%, Apple, Amazon and Microsoft closing the month with an 8%-8.5% gain, and Tesla being up 12.3%. Dow Jones Industrial Average Index rose by 1.4%, while Russell 2000 was down 0.6%. Most indices reached their all-time highs on June 28, following the release of PCE inflation figures, which signaled of slowing inflation and possible rate cuts in the near future.

More action on the European venues

Meanwhile European STOXX 600 Index, which tracks the returns of the largest companies listed on the stock exchanges of 17 European countries, lost 1.3%. The unexpected decision of Emmanuel Macron to dissolve the parliament after failed European elections and invite the public to the ballot boxes yet again did not help the French CAC 40, which lost 6.4% over the month. The shares of leading French banks were under strong pressure: Societe Generale lost 19.9% of its value with Credit Agricole down 14.1% and BNP Paribas losing 12.2%. Although the main wave of selling is most likely over, we should expect that at least some pressure on stock prices will remain in the short term.

European and US equity markets

Source: Bloomberg and Signet Bank

Politicians take central stage

The parliamentary elections in the UK have ended with the Tories suffering a staggering defeat at the hands of the Labor Party led by Sir Keir Starmer. The new parliament will be fully operational closer to fall, when, after a short summer break and party conferences, the heads and members of all parliamentary committees will be determined, and the government will present a budget for the upcoming months, shaping the direction (and sources of money) for the country and its economy. So far there has been no visible market reaction to the political changes. In the United States presidential debates were held between incumbent president Joe Biden and presidential candidate Donald Trump. The winner of the debates is considered to be Trump despite weaknesses of his arguments. It is noteworthy that the debates were held unconventionally early – usually the show takes place in September after the party conventions, when Republicans and Democrats officially endorse their candidates. It should also be noted that the debates took place against the backdrop of ongoing rumors about a possible replacement of Joe Biden as a candidate. The party has no real ways to replace President Biden without his consent, and he must make such a decision before the August Democratic National Convention. So far there are no signs that the incumbent president is ready to withdraw from the race, but should the situation change, we definitely will see more market volatility. Now traders’ positioning in the S&P 500 futures has only slightly shifted to bearish sentiment, so we continue to stick to the opinion that we should not expect sharp market movements during the summer. Still, fixing some profits at current levels is a fairly justified approach.

Benchmark 10-year bond yields

Source: Bloomberg and Signet Bank

Dollar gains ground; precious metals consolidate near support levels

The greenback dominated FX markets in June, with Japanese yen continuing its fall. Dollar index (DXY) overall looks like needing more of a push upwards, thus we might expect euro and pound sterling to lose more ground against the dollar when current consolidation is over.

As the economic situation remains uncertain with geopolitical tensions and the conflict in the Red Sea also adding to volatility, OPEC+ announced additional production cuts in June, with oil trading between $80 and $83 per barrel. We continue to view energy sector as an inexpensive hedge against current tail risks, with sector companies offering good value for money.

Gold prices continued to consolidate around their initial support zone of $2300-$2250 per troy ounce. Silver, though showing more volatility, is acting similarly, having bounced off key support levels near XAG/USD 29.00-28.50. Having cut on our exposure to gold, we continue to hold silver and platinum, expecting more upside in the short term.

High Yield bond Indexes

Source: Bloomberg and Signet Bank

Manufacturing continues to be a problem

According to the ISM report, manufacturing continued its slide in the U.S., with Purchasing Manager’s Index coming in at 48.5, slightly down from May readings. Among six largest sub-indices directly affecting the report, only Chemicals had experienced growth in June, while only two industries (Computer & Electronic Equipment and Chemicals) reported growth in new orders. The S&P Global report, however, showed a more positive picture with business activity accelerating to its highest level in 26 months and activity in the service sector being above 50 mark for 17 consecutive months. Wages in the services sector rose by the largest amount in five months with employment in the sector also rising. Also, according to the S&P Global, manufacturing PMI

rose from 51.3 in May to 51.7 in June (contrary to ISM observations). Unemployment rate in the U.S. was up slightly (4.1%), while non-farm employment change showed 206 000 jobs created in June. May figures were heavily revised down though – from 272k to just 218k.

The Eurozone business activity was faring quite well at the end of the second quarter according to preliminary PMI survey data. Though seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index dropped to 50.8 in June from 52.2 in May (with falling new orders being the central factor behind the decline) it still is above the 50 points mark. According to the S&P Global, rate of inflation in output prices was at an eight-month low, while in input costs it was at the six-month low. According to Eurostat, Eurozone’s annualized CPI reading for June slowed slightly (2.5% versus 2.6% in May), while annual core CPI (excludes food, energy, alcohol and tobacco) stood unchanged at a 2.9% level. The unemployment rate was unchanged at the 6.4% level, while job creation was slowing.

China’s industrial activity contracted for the second straight month, while the non-manufacturing sector grew at a slower pace. Data from the National Bureau of Statistics showed that Chinas official PMI for the manufacturing sector stood at 49.5 in June, unchanged from May’s figure. The official PMI Composite Index, which includes manufacturing and non-manufacturing indicators, fell by half a point to 50.5 in June.

Gold price, USD/oz

Source: Bloomberg and Signet Bank

Nothing new on the fixed income front

On June 6, the European Central Bank decided to cut its main refinancing rate by 25 basis points. As inflation in the Eurozone is slowly easing, many anticipate more rate cuts this year. Federal Reserve, on the other hand, kept interest rate steady in June. Morgan Stanley strategists noted that the Federal Reserve and the ECB may decide to cut interest rates in September as key data gives new signs of cooling inflation in the U.S. and Europe.

Annual yields on 10-year Treasuries declined by 10 basis points to 4.4% in June. Yields are declining slowly, but consistently, and it seems that market participants are becoming more and more convinced that the first interest rate cut in the U.S. will take place in September, and this happens despite the hawkish statements by Fed officials that rates should be kept “higher for longer”. The futures market is 100% confident that the Federal Funds Rate will be lowered by 25 bps in September and by 25 bps in December – a very categorical view, it must be said. At the same time, we do not change our recommendation to accumulate positions in 10-year Treasuries at yield levels of 4.5% and above.