Equity markets ended the first half of the year on a largely positive note, as investors shrugged off hawkish central banker comments. Last week was relatively quiet in terms of news flow, but at the annual European Central Bank (ECB) conference in Sintra, commentary from leaders at the major central banks suggested there was more work to do in taming inflation. Nonetheless, most equity benchmark indices moved higher throughout the week, with the MSCI World Index up 2.2%; the S&P 500 Index up 2.3%; the STOXX Europe 600 Index up 1.9%; and the MSCI Asia Pacific Index up 0.2%.1
The picture was largely positive for global markets in the first half of 2023. Moves in US technology stocks were the most eye-catching. After a tough 2022 for the tech-heavy Nasdaq Index (down 32%), it bounced back sharply in the first half of 2023, with its best first-half performance in 40 years, up 39%.2 Nearly US$5 trillion has been added to the value of companies in the Nasdaq 100 since the start of the year, and with the strength in tech heavyweights, the S&P 500 Index is up 16% year-to-date (YTD) in 2023.3
Gains were even more pronounced looking at the NSYE FANG Index,4 which was up 75% YTD.
In other regions, the STOXX Europe 600 Index was up 8.7% YTD, its highest level since 2007, with the UK’s equity benchmark lagging, up just 1.1% YTD. In Asia, Japan’s market was the star performer, up 27.2% YTD, while China A-Shares have languished as the reopening trade stalled, slipping 0.8% YTD.
With the recent gains, global stocks (MSCI All Country Index5) have logged a third quarter of gains.
Week in review
US equities were higher last week, albeit in quieter markets ahead of the Independence Day holiday on the 4th of July. Some benign macro data eased fears of a hard landing (harsh recession) for the US economy. Data from the US housing market also continues to surprise on the upside, with May new home sales surging 12.2% and a couple April house price indices coming in better than expected.
On the inflation front, there was also encouraging news. The core reading of the Personal Consumption Expenditures price index, a gauge the Federal Reserve watches closely, rose 4.6% in May, which was less than expected.
Federal Reserve (Fed) Chair Jerome Powell spoke at Sintra at the ECB conference and stuck with a broadly hawkish narrative. He suggested the Fed could potentially raise interest rates in July and September to curb persistent price pressures and cool a surprisingly resilient US labour market. Asked whether Fed officials now anticipate they will raise rates every other meeting after skipping a hike this month, he said that may or may not happen and that he wouldn’t rule out consecutive rate hikes.
The market is pricing in one to two more hikes this year, with a terminal rate of 5.4% vs. 5% currently.6
Elsewhere, given the recent problems with Silicon Valley Bank and others, it was reassuring to see US banks perform well as 23 banks passed the US stress tests.
Looking ahead, all eyes are on second-quarter earnings season. It is worth noting the US companies will enter blackout periods when their buybacks will go on hold, removing some support for markets.
European markets saw a positive end to the quarter and first half of the year, trading up 1.9% last week. Focus was on inflation data across the eurozone. The June core Consumer Price Index (CPI) reading was slightly higher than expected, at +5.4%. There were contrasting fortunes across the continent, with Spanish inflation actually falling below 2% (1.6% CPI) while Germany saw CPI at 6.3%.
European central bankers were also in action at Sintra, and the tone was unsurprisingly hawkish. ECB President Christine Lagarde said the central bank probably won’t be able to declare the end of its interest-rate hiking cycle anytime soon, stating, “It is unlikely that in the near future the central bank will be able to state with full confidence that the peak rates have been reached”.7
In this context, European bond yields were higher on continued hawkish data.
Bank of England Chair Andrew Bailey said that there are signs of persistence in recent inflation data and that core prices in the United Kingdom are much stickier.
European equities continue to suffer from outflows, as the latest EPFR Global data showed that European stock funds suffered a 16th straight week of investment outflows, taking total withdrawals to US $27 billion YTD, and in the past week alone, Europe had biggest outflows among major regions with a US$4.6 billion exodus.8
Markets were more subdued in Asia vs. other regions last week, with the MSCI Asia Pacific Index up 0.2%. It was a familiar picture, with equities in Hong Kong (+0.1%) and China (+0.1%) lagging while Japanese equities (+1.2%) outperformed. Look at YTD performance, it is worth stressing how well Japanese equities have done.
Last week saw some further lacklustre Chinese macro data, with the official manufacturing Purchasing Managers Index (PMI) coming in at 49, still in contraction mode. The non-manufacturing PMI came in slightly better at 53.2. Note, today the Caixin June PMI came out and was a bit better than expected at 50.5.
In terms of geopolitics, US Treasury Secretary Janet Yellen is visiting China to meet with Chinese counterparties. That said, there was some noise in the press that the Biden administration is considering new curbs on artificial intelligence (AI) exports to China.
Any news on potential Chinese stimulus will be closely watched this week. At a World Economic Forum Event, Chinese Premier Li Qiang was quoted as stating China will roll out more effective measures to expand domestic demand.
Elsewhere, Australia’s May inflation reading was much lower than expected, with the CPI coming in at 5.6%. The Reserve Bank of Australia meets on 4 July.
The week ahead
With a US half day on 3 July and full market holiday on Tuesday the 4th, we expect a quiet start to the week. In Europe, trading volumes were below average to start the week. Markets will have an eye on the Australian central bank interest-rate decision and the minutes from the last Fed meeting, which will be released Wednesday, so there are some interesting central bank events this week.
In terms of macro data this week, the US Institute of Supply Management data for June is a highlight, with manufacturing on Monday and services on Thursday. EU manufacturing PMI’s will also be released this week.
Finally, the June US employment report will be released on Friday, which is always captures market attention.
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1. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
2. Source: Bloomberg, as of 30 June 2023.
4. The NYSE FANG+ Index that provides exposure to a select group of highly traded growth stocks of next generation technology and tech-enabled companies. “FAANG” refers to the stocks of five prominent American technology companies. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
5. The MSCI All Country World Index I captures large- and mid-cap representation across 23 developed markets and 24 emerging markets countries. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
6. Source: Bloomberg, based on the federal funds futures market. There is no assurance that any estimate, forecast or projection will be realized.
7. Source: Bloomberg. “ECB Won’t Be Able to Declare Rate Peak Anytime Soon, Lagarde Says,” 27 June 2023.
8. Source: EPFR, Barclays Research.