Alexander Grace Chartered Financial Planner

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June 2024 Market commentary

The global financial markets have encountered a challenging year, characterised by a complex mix of geopolitical tensions, inflationary pressures, and evolving central bank policies. This detailed analysis explores the primary factors affecting financial markets in different regions, including the UK, Europe, the United States, the Far East, and emerging markets.

United Kingdom

The UK financial markets have been adjusting to recent policy changes by the Bank of England. The bank increased interest rates to 5.25% to combat persistent inflation. Despite higher borrowing costs contributing to a cooling housing market, the FTSE 100 showed significant gains, especially in the energy and financial sectors. 

The FTSE 100 displayed resilience, reaching record highs in June. Although there was a slight dip in late May, UK equities had an overall positive month. However, uncertainties around trade agreements and regulatory changes, along with the upcoming general election, present potential risks. 

The reduction of the energy price cap to £1568 in July is expected to save £122 annually on typical bills, marking the lowest level in two years. However, with bills still higher than three years ago and an increase anticipated in October, the impact may be short-lived, potentially leading to consumer apathy towards switching energy tariffs. 

Europe

In May 2024, European markets reflected continued economic fragmentation. The European Central Bank (ECB) maintained a cautious approach, keeping the key interest rate at 3.75% to balance growth and control inflation. The DAX and CAC 40 showed mixed performance. The manufacturing sector faced challenges due to supply chain disruptions and energy price volatility resulting from the prolonged Ukraine conflict. However, the tech sector experienced a rebound driven by innovation and increased digital adoption across the continent. 

Speculation about potential ECB rate cuts due to falling inflation persists. Inflation rates moderated from double digits in 2022 to 2.6% in March 2024, with projections of 2.3% for the year and 2% in 2025. Despite economic fragmentation, the eurozone’s monthly trade surplus reached a record €27bn in March, thanks to increased exports and decreased imports. 

Germany’s DAX index rose by 4.61% in April, driven by strong corporate earnings. Spain’s GDP increased by 0.6% in late 2023, and Ireland is forecasted to experience solid growth due to rising wages and falling inflation. However, economic performance varies across member states, with Germany expecting a slight GDP decline due to reduced demand for industrial products. 

 United States

In the United States, May was marked by significant market movements influenced by the Federal Reserve’s aggressive monetary tightening. The federal funds rate stands at 6%, with inflation showing signs of moderation but economic growth slowing. The S&P 500 and NASDAQ experienced volatility, with tech and growth stocks particularly sensitive to interest rate hikes. 

The US labour market remains tight, with a slight increase in the unemployment rate from 3.7% to 3.9%. The S&P 500 and NASDAQ experienced significant volatility but ended the month with gains, indicating a strong market performance amid mixed economic signals. 

The upcoming presidential election adds a layer of uncertainty to the market. Historically, markets experience volatility during election years, but long-term impacts are usually limited, emphasising the importance of focusing on fundamental economic indicators over political developments. 

 Far East  

The Far East markets have demonstrated resilience despite ongoing geopolitical challenges. In China, the Shanghai Composite rebounded from some of its losses following the relaxation of stringent COVID-19 lockdowns and stimulus measures aimed at revitalising the economy. However, the tech sector is facing regulatory scrutiny, which is impacting investor enthusiasm. 

Japan’s Nikkei 225 has performed well, supported by strong corporate earnings and accommodative policies from the Bank of Japan. Despite challenges posed by a weakening yen and global supply chain disruptions, Japan’s export market continues to thrive, driven by strong demand for electrical machinery and cars. 

 Emerging Markets

Emerging markets are facing a challenging environment marked by capital outflows and currency fluctuations. Countries such as Brazil and South Africa are particularly impacted by the increasing global interest rates, which are leading to higher borrowing costs and inflationary pressures. 

India stands out as a bright spot, showing strong economic growth driven by robust domestic demand and a thriving tech sector. In late 2023, India’s GDP grew by 8.4%, with projections indicating a continuation of this strong growth. In contrast, Brazil and South Africa are grappling with challenges posed by the rising interest rates and economic volatility. 

Conclusion 

In essence, the global financial markets are currently experiencing increased uncertainty and volatility. Regional variations highlight the significance of having a diversified portfolio and adopting a long-term investment approach. It is important to closely monitor central bank policies, geopolitical developments, and economic indicators to comprehend and predict market shifts in different regions. 

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