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MARKET UPDATE
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SUMMARY
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Financial markets globally saw positive returns from equities and bonds.
The Federal Open Market Committee (FOMC) left interest rates in the US unchanged, with Chairman Powell reiterating a desire to lower rates when data permits, leading to a drop in government bond yields.
Weakness in the labour market emerged as payrolls data was significantly weaker than anticipated on Friday. .
The eurozone saw benign inflation data, reinforcing expectations for a June rate cut.
UK equities performed well, driven by a rotation towards value stocks, further supported by rising yields and a softer Pound.
Commodities faced a downturn, especially oil, due to easing geopolitical tensions and increased US oil inventories.
This week the Bank of England (BoE) rate decision is due on Thursday. The BoE is unlikely to cut rates.
On Friday, UK Gross Domestic Product (GDP) data is due as economists anticipate the economy rebounded in the first quarter from the extremely mild recession at the end of last year.
OUR ANALYSIS
It was another solid week for financial markets, with equities and bonds in most regions delivering positive returns.
Although US economic activity appears healthy, signs of weakness in the labour market began to show. A particularly soft payrolls report on Friday spurred an equity and bond market rally on the basis that it increases the likelihood of a rate cut.
In response to high costs across the supply chain, including wage inflation, companies have embarked on numerous productivity and cost-saving measures to enhance their profit margins. These initiatives have broadly fortified operating margins throughout this quarter, reflecting an overarching theme of margin improvement in the current earnings cycle. This trend bodes well for future earnings potential, providing that economic growth remains resilient.
In the eurozone, relatively benign inflation data reinforced expectations for a June rate cut. The futures market is now pricing in a 95% probability of a cut in June. Economic growth in the first quarter surprised on the upside, recovering from negative territory in the final quarter of last year. The European Central Bank (ECB) remains watchful of wage pressures but is hinting at further rate cuts in 2024. The ECB will need to be careful of creating too much of an interest rate differential - cutting too much ahead of the US - as this could cause volatility in the single currency.
UK equities performed well last week with the FTSE All Share rising 1%. There was a rotation from European stocks into the more value oriented, and cheaper, UK market, with European equities falling 1.5% in GBP terms. This rotation was underpinned by the revival of lagging benchmarks, with UK and Chinese stocks emerging as some of the best performers globally. Value stocks took the lead, with sectors such as energy, mining, and banks significantly outperforming. The UK benefitted notably from exposure to these areas, with mining M&A activity providing additional support to the sector. Rising yields, high oil prices, and a softer Pound further bolstered the FTSE.