Equity markets retreated a little further last week, with the US falling a sizeable 2.3% on Wednesday before recovering some of these losses on Friday. Global equities ended the week down 0.5% and are off a relatively modest 3% or so from their mid-month high and remain up over 10% year-to-date.
More dramatic has been the recent switch within the US equity market out of the Magnificent Seven tech stocks into small cap and this continued last week. The former are now down 12% from their high earlier this month while small cap have outperformed the Mag 7 by 25% since the rotation began.
The UK has benefited from its lack of large tech stocks and was the top performer last week, gaining 1.6%. The US, by contrast, ended the week flat in sterling terms while emerging markets lost 0.8% and Japan was down 2.8%.
Bonds, meanwhile, had another quiet week with yields little changed by the latest US inflation and growth numbers. The Fed’s favoured measure of US core inflation came in pretty much in line with expectations and was unchanged in June at 2.6%.
As for GDP, it posted a stronger than expected 2.8% annualised gain in the second quarter, rebounding from the sluggish 1.4% rise seen in the first. Consumer spending put in a respectable performance, easing some of the concerns over the health of the consumer arising from a decline in confidence in recent months.
Overall, the data did little to change perceptions on the outlook for Fed policy. There is a slim chance that the Fed could start cutting rates on Wednesday but much more likely is that it delays the start until its subsequent meeting in September.
For equities, the US earnings season at least near term is just as important as the macro data. And the Mag 7 are very much the centre of attention given they have driven much of the market’s gains this year.
Tesla and Alphabet (Google) have kicked off this group’s results and both disappointed. Tesla’s profits were down over 40% on a year ago. And while Alphabet’s earnings met expectations, investors were a little alarmed by the company’s comment that it had yet to receive any commercial benefit from its heavy spending on AI.
This week’s crop of results – Microsoft reports on Tuesday, Meta on Wednesday and Apple and Amazon on Thursday – will be centre stage but will have to compete not only with the Fed meeting but also the monthly payroll numbers on Friday.
Elsewhere, Japan has been in the news recently due to the yen which has been on a rollercoaster ride. Having hit a new low early this month (despite intervention by the authorities to support the currency), it has subsequently recovered sharply.
This rebound has even been associated with the sell-off of in technology as investors may have been forced to close investments which had been financed by borrowings in yen. It has also been a factor behind the Japanese market’s poor performance last week. The Bank of Japan meets this Wednesday and the question is whether it will continue slowly raising rates or wait until later in the year to implement its next small increase.
In China, following the disappointment over the lack of new policy initiatives at the recent big meeting of the Communist party, there have been a couple of steps in the right direction. Interest rates have been nudged down 0.1%, the first cut since last August, and there has been a new, albeit small, initiative to support consumer spending.
Back here in the UK, there was little news last week. But today is expected to see Rachel Reeves reveal an ‘unexpected’ shortfall in public finances of some £20bn, paving the way for some tax rises in an autumn budget. With an increase in the big four taxes ruled out, potential candidates include capital gains tax, pension tax relief and inheritance tax.
Then on Thursday, we have the Bank of England meeting and it is a close call whether it will decide to kick off the rate-cutting cycle or wait until September. Regardless, there will be a lot for market participants to focus on this week, some of it no doubt from the beach.
Rupert Thompson – Chief Economist