June – August 2024

Whilst still positive, the S&P Euro Plus lagged the other indices in local currency terms, increasing by +0.98%. From the perspective of a UK investor, the past three months remained positive despite the headwind of a stronger Pound – which appreciated +3.10% against the dollar and +1.18% against the euro. Despite increased volatility in August, the US was the standout performer of the major market segments, followed by fixed-income indices, which benefitted from the reduction in bond yields over the period. Generally, markets were positive, with the only major laggard being Europe. Full index returns in sterling terms are below:

This market performance came against a backdrop of central banks finally beginning their rate-cutting cycle, with the Bank of Canada on 5th June and the European Central Bank on 6th June leading the way. The ECB cut from 4% to 3.75%, with President Lagarde stating the inflation outlook had improved ‘markedly’. Whereas policymakers held their rate level at the July meeting, they said the possibility of another cut in September was ‘wide open’ – a possibility that increased at the end of August when headline inflation dropped to 2.2%. The Bank of England was the next central bank to follow suit on 1st August, reducing their rate from 5.25% to 5%, with members of the Monetary Policy Committee narrowly voting to do so by 5 votes to 4. This comes off the back of a calmer macroeconomic backdrop, as headline inflation for July came in at 2.2% after two consecutive months at the 2% target – and a 0.6% growth in GDP in the second quarter. The Federal Reserve is still yet to cut their rates; however, with growing weakness in the labour market in August, markets have priced in a high likelihood that the first cut will occur at their 18th September meeting.

Political developments significantly influenced financial markets over the last three months, with major elections in the UK, Continental Europe and India. Firstly, the European Parliamentary elections saw left-wing and centrist parties lose ground to more right-wing parties – not overly newsworthy on the face of it – though this did result in some rather dramatic outcomes, with the most significant of these being French President Emmanuel Macron dissolving parliament and calling for a snap election. Although it looked like the far-right National Rally party would end up the largest party after the first round of voting, this was prevented by a tactical alliance between Macron’s centrist ‘Ensemble’ coalition and the left-wing alliance in the second round of voting on 7th July. Ultimately, no party ended up winning a majority of seats, with a hung parliament declared – a situation which threatens to usher in a sustained period of political paralysis within the European heavyweight. European markets were impacted by these political developments over the past 3 months, particularly in France, where the CAC 40 shed -4.53%.

In India, incumbent Prime Minister Narendra Modi, in power since 2014, was expected to win a large majority owing to the country having enjoyed strong economic growth since he was first elected. However – his Bharatiya Janata Party won just 240 out of 543 seats, resulting in a hung parliament. As the results were being announced, the MSCI India index fell over -7% as investors feared Modi’s influence would be diminished – though the index recovered quickly as it became clear he would stay in power as the head of coalition government, and the Nifty 50 returned to strength gaining +12.01% over the period.

UK Prime Minister Rishi Sunak also declared his own general election earlier in the year, which took place on 4th July. After 14 years in power, the Conservative Party lost almost two-thirds of their seats – falling from 344 to 121, including that of twelve Cabinet ministers and former Prime Minister Liz Truss’. Labour conversely won a total of 411 seats, a 174-seat majority, with Sir Keir Starmer becoming only the second elected labour prime minister since 1974. Whilst helped in part by improved inflation and GDP readings, the FTSE All-Share gained +1.32% during the period.

The most recent month of August saw some extreme bouts of volatility, as it commenced with the unemployment rate in the US unexpectedly ticking up to 4.3% against expectations of 4.1% – with this rattling US investors who had been confident of a smoother economic outlook through until at least the end of 2024. US indices swiftly reflected this change in sentiment, as the S&P 500 shed -6.08% during the first 5 days of the month, and the NASDAQ fell -7.95%. These fears coincided with the Bank of Japan’s decision to unexpectedly raise their interest rate on 31st July by 15 bps to 0.25%, a decision which negatively impacted institutional investors who had been taking advantage of the difference between the low interest rates in Japan and higher rates attainable by lenders in other international markets, a trade known as a ‘carry trade’. These carry trades quickly unwound, resulting in the Nikkei’s worst one day fall since October 1987, plummeting -12.40% on 5thAugust. The poor start to the month was, ultimately, short-lived as by the close of the month, indices were back to similar levels they had finished July, with the S&P 500 rallying +2.30% and the Nikkei 225 falling just -1.16%.