- Markets in June
- Global market indices
- Currencies
- Cryptocurrencies
- Fixed Income
- Commodity sector news
- Key events in July
Markets in June
It’s been another amazing month for equity markets. Big tech was again the primary driver despite some signs of easing in US consumption. A sequence of economic indicators now signals a slowdown in the US economic activity, additionally, the disinflation process has resumed to an extent, reviving hopes for a reduction in borrowing costs by the year end.
The S&P 500 is up +3.80% MTD, while the Nasdaq 100 and Dow are up +6.28% and +1.14%, respectively. The NYSE is -0.50 %.
European equity markets experienced significant volatility due to political uncertainty surrounding France's upcoming parliamentary election on Sunday. France's CAC 40 index suffered the most among European indices, declining -3.58% this month. This shift in sentiment appears to be widespread, as performance across European equities has been subdued compared to their US counterparts.
In the bond market, yields have decreased across both the US and Europe. The yield on the 2-year US Treasury note, which is closely tied to the Fed Funds rate, has fallen from 4.94% in May to 4.74%. The benchmark 10-year US Treasury note yield has declined to 4.23% from May's 4.56%, while the 30-year bond yield has dropped from 4.70% to 4.36%. In Europe, the 10-year German bunds yield has decreased by -21.8 basis points (bps), and the UK 10-year yield has fallen by -18.2 bps.
The Economic Picture
The US labour market is exhibiting signs of moderation, with the economy adding approximately 272,000 jobs in May. The unemployment rate rose to 4.0% in May from 3.9% in April, marking its first time reaching 4.0% since January 2022. Crucially for the Fed, the labour force participation rate declined from 62.7% to 62.5%, indicating a shrinking proportion of individuals working or actively seeking employment. Average hourly earnings grew by 4.1% y/o/y in May 2023, while "real" average hourly earnings (adjusted for inflation) increased by 0.8%, up from April's 0.5%. Wage growth within a range of 3.0% to 3.5% is generally considered aligned with the Fed's 2% inflation target.
The inflation rate decreased to 3.3% y/o/y in May, slightly below April's 3.4%, marking the second consecutive month of easing inflation. This decline was partly attributable to lower gas prices. However, shelter prices continued their upward trajectory, rising 2.0% for the fourth consecutive month.
Consumer sentiment indicators suggested a modest decline in consumer confidence. The Conference Board's consumer confidence index experienced a dip to 100.4 in June from 102.0 in May. Furthermore, the University of Michigan's consumer sentiment index declined for the third consecutive month, reaching 65.6 in June 2024, its lowest level since November, down from 69.1 in May. The current conditions gauge fell to 62.5 from 69.6, and the expectations sub index decreased to 67.6 from 68.8. While year-ahead inflation expectations remained steady at 3.3%, the five-year outlook edged up to 3.1% from 3%.
The flash Composite PMI Output Index ticked up to 54.6 from May's 54.5, reaching a 26-month high. This increase was primarily driven by the services sector, with the S&P Global flash index for service providers rising 0.3 points to 55.1, its highest level since April of 2022. The manufacturing flash PMI also improved, reaching 51.7 from May's 51.2, marking a 3-month high.
Uncertainty surrounds the timing of the ECB second interest rate reduction, with money markets pricing in 58 basis points (bps) of easing in 2024. This suggests two cuts are expected, with an approximate 30% probability of a third by year-end. However, ECB officials express diverse opinions on the matter, with Olli Rehn, Governor of the Bank of Finland, positing the possibility of borrowing costs reaching as low as 2.25%-2.50% in 2025.
The ECB's inflation forecast indicates a persistent overshoot of its 2% target for the remainder of 2024, though a downward trend is anticipated to resume in the following year, with inflation aligning with the target by the end of 2025. Despite a slight decrease in the eurozone unemployment rate to 6.40%, wage pressures persist as a concern. This is notable in light of the euro area's annual inflation rate, which rose to 2.6% in May 2024 from 2.4% in April.
In the UK, inflationary pressures continued to subside in May, with the headline rate declining to 2.0% year-on-year from April's 2.3%, reaching its lowest point since July 2021. While core inflation measured 3.5%, services prices remained elevated at 5.7%. Concurrently, unemployment edged up to 4.4% from 4.3%, while average wages held steady at 6.0%, consistent with the previous three-month period. The annual growth in employees' average total earnings, inclusive of bonuses, also remained unchanged at 5.9%.
On the growth front, the S&P Global flash Composite PMI for June dipped to 51.7, down from May's 53.0 and marking a seven-month low. The flash Services PMI similarly declined to 51.2 from 52.9 in May, also a seven-month low. Nevertheless, consumer sentiment is showing signs of improvement, as evidenced by the GfK Consumer Confidence Survey, which indicated a rise in the confidence index to -14 in June, a three-point increase from May. Notably, three measures improved, one declined, and one remained unchanged compared to the previous month's announcement. Retail sales volumes experienced a decrease in the year leading upto June, following a modest recovery in May.
The BoE maintained interest rates at 5.25%, citing a "finely balanced" decision for some of the nine members on the Monetary Policy Committee, emphasising the necessity of restrictive monetary policy to curb inflation. Markets are currently pricing in a greater than 50% probability of a rate adjustment in August as price pressures ease and inflation declines. However, service sector prices remain high despite the falling headline inflation.
As the UK prepares for a general election on 4th July, the economy may be less of a pressing concern, given the relatively low unemployment rate and wages continuing to outpace inflation. Nonetheless, tax increases and spending cuts are anticipated regardless of which party emerges victorious in the election.
Global Market Indices
US:
S&P 500 +4.25% QTD and +14.84% YTD
Nasdaq 100 +6.68% QTD and +15.74% YTD
Dow Jones Industrial Average -1.00% QTD and +4.57% YTD
NYSE Composite -1.68% QTD and +6.83% YTD
The Equally Weighted version of the S&P 500 posted a -0.81% decline this month, its performance is +3.91% YTD, 10.93 percentage points lower than the benchmark.
The S&P 500 Information Technology sector is the top performer this month +9.83% MTD +28.42% YTD, while the Utilities sector is –4.86% MTD, while still being +8.60% YTD.
Overbought market conditions underscore tech-driven concentration in S&P 500. Although the equal-weight S&P 500 outperformed the benchmark last week (and continues to outperform today), it has lagged by approximately 11 percentage points YTD. This discrepancy reflects the concentration dynamics surrounding large technology companies, fueled by their exceptional earnings growth and the ongoing AI-driven momentum. Additionally, the hawkish repricing of Federal Reserve pivot expectations this year has contributed to a broader market overhang.
Morgan Stanley highlighted that recent strength in big tech has propelled the Nasdaq's 14-day Relative Strength Index (RSI) to around 82, its highest level in over four years. The firm also noted that the S&P 500 is currently in overbought territory. However, it emphasised that this overbought condition does not extend to individual stocks, as only about 8% of S&P 500 constituents have an RSI above 70.
Upcoming Q2 earnings season in focus. Regarding guidance for Q2, the proportion of S&P 500 companies issuing negative EPS guidance is consistent with historical trends. To date, 111 companies within the index have provided EPS guidance for the quarter, with 67 (60%) issuing negative guidance. While this exceeds the five-year average of 59%, it remains below the ten-year average of 63%.
The S&P 500 is projected to report y/o/y earnings growth of 8.8%, a slight decrease from the 9.0% estimated on 31st March. Should this growth rate materialise, it would represent the highest since Q1 2022, when it reached 9.4%, and mark the fourth consecutive quarter of earnings growth for the index.
Earnings growth for Q2 is expected to be broad-based, with eight of the eleven sectors anticipated to report y/o/y increases. Four sectors are projected to achieve double-digit growth: Communication Services, Healthcare, Information Technology, and Energy. Conversely, three sectors, led by Materials, are forecast to experience a y/o/y earnings decline.
The estimated annual revenue growth rate for Q2 2024 is 4.6%. If achieved, this would constitute the fifteenth consecutive quarter of revenue growth for the index. Ten sectors are projected to exhibit y/o/y revenue growth, led by Information Technology and Energy. However, the Materials sector is anticipated to experience a decline of 1.9%.
The estimated net profit margin for the S&P 500 for Q2 2024 is 12.0%, surpassing the previous quarter's margin of 11.8%. At the sector level, seven sectors are expected to report y/o/y expansion in net profit margins, led by Information Technology and Communication. In contrast, four sectors are projected to report contractions, with the Real Estate sector experiencing the most substantial decline.
Europe:
Stoxx 600 +0.42% QTD and+7.48% YTD
DAX -1.82% QTD and +8.38% YTD
CAC 40 -7.27% QTD and +0.87% YTD
FTSE 100 +4.14% QTD and+7.09% YTD
IBEX 35 -0.40% QTD and +9.19% YTD
FTSE MIB -2.63% QTD and +11.48% YTD
In Europe, the Equally Weighted version of the Stoxx 600 is -2.60% in June, and its performance is +3.54% YTD, 4.04 percentage points lower than the benchmark.
The Stoxx 600 Technology sector is the leading sector this month, up +4.50% MTD +16.34% YTD, while the Retail sector has exhibited the weakest performance at -2.63% MTD and +7.90% YTD.
STOXX 600 Earnings Q1 2024: Positive surprises and country-specific growth. LSEG I/B/E/S data as of June 25th indicates a projected 3.3% decrease in Q1 2024 earnings compared to Q1 2023. However, excluding the Energy sector, earnings are expected to increase by 0.7%. Revenue for Q1 2024 is projected to decrease by 4.6% compared to Q1 2023, and excluding the Energy sector, revenues are expected to decrease by 3.1%.
Of the 289 STOXX 600 companies that have reported Q1 2024 earnings, 60.6% surpassed analyst estimates, exceeding the typical quarter's beat rate of 54%. Similarly, 51.3% of the 345 companies reporting Q1 2024 revenue exceeded analyst estimates, compared to the typical 58%.
The Financials sector demonstrated the highest percentage of companies reporting above estimates (78%), while Utilities had the highest earnings surprise factor at 33%. Conversely, the Real Estate sector had the lowest percentage of companies reporting above estimates (20%) and the lowest earnings surprise factor (-10%).
The STOXX 600 surprise factor stands at 10.4%, surpassing the long-term average of 5.8% (since 2012). Analysts anticipate positive earnings growth from 7 of the 15 countries represented in the STOXX 600 index. Portugal (96.6%) and Italy (12.5%) exhibit the highest estimated earnings growth rates, while Poland (-27.8%) and Austria (-26.1%) have the lowest.
Global:
MSCI World Index +2.43% QTD and +11.08% YTD
Hang Seng +9.36% QTD and +6.12% YTD
Mega cap stocks had a strong performance in June with Nvidia +15.29%, Apple +10.92%, Tesla +10.27%, Meta Platforms +9.92%, Amazon +9.73%, Microsoft +8.92%, and Alphabet +6.60%.
Energy stocks experienced a decline this month, with the energy sector -2.04% in June and +8.37% YTD. WTI was +4.98% and Brent +4.15% in June. Baker Hughes Company +0.81%, Occidental Petroleum Corporation +0.59%, Shell -0.73%, Marathon Petroleum -1.31%, Phillips 66 -1.64%, ExxonMobil -2.43%, Chevron -3.91%, Apa Corp -6.19%, Halliburton -7.28%, and Energy Fuels -15.01%.
From mergers to divestitures: US Oil and Gas industry faces asset restructuring challenges. US oil and gas companies face a formidable challenge in selling approximately $27 billion in assets to finance investor payouts over the next few years, as the largest wave of energy megamergers in 25 years nears regulatory conclusion. Share buybacks and dividends are crucial to attracting investors back to an industry that many have avoided due to volatile returns and decarbonisation pressures. Energy stocks currently comprise only 4.1% of the S&P 500 by weight.
Finding new owners for these properties will be neither swift nor straightforward, caution bankers and analysts. There are fewer interested institutional and European oil buyers, coupled with a lack of available capital to finance these transactions. Private equity firms, previously active in acquiring Big Oil's divested assets, have shifted focus towards energy transition, social impact, and renewable investments.
The scale of recent mergers has been unprecedented, with $180 billion invested across six deals since October. Driven by the imperative to secure oil reserves for future exploitation, most of these deals are expected to conclude this year, releasing a flood of oil wells, pipelines, offshore fields, and infrastructure packages into the market. The absence of readily available buyers suggests that sales will be protracted and may involve asset swaps rather than cash transactions.
Three acquirers - Chevron, ConocoPhillips, and Occidental Petroleum - have pledged to raise between $16 billion and $23 billion combined from post-closing sales. ExxonMobil, the leading dealmaker, has not disclosed a specific divestiture target but has generated $4 billion per year in sale proceeds since 2021.
In addition to the dwindling pool of private equity and international buyers, more rigorous regulatory reviews have delayed the commencement of marketing efforts. Some investment bankers anticipate that the divestiture process could extend well into next year.
Exxon, having acquired Pioneer Natural Resources for $60 billion in May, intends to sell a collection of conventional oil and gas properties across the Permian Basin to prioritise higher-growth assets. Conoco is prepared to sell Western Oklahoma gas properties acquired in its $22.5 billion deal for Marathon Oil, and Chevron will likely offer some of Hess' Asia offshore assets alongside its existing Canadian and US gas packages.
Occidental has prepared a sale of West Texas shale assets, potentially fetching $1 billion, and could add offshore Gulf of Mexico and Middle East assets upon closing its CrownRock acquisition. Exxon confirmed it is exploring a sale of select conventional oil assets in West Texas and New Mexico but has not established a new asset sale target since the Pioneer deal.
Following the Hess acquisition, Chevron could generate $10 billion to $15 billion in pre-tax proceeds through 2028. However, a significant disconnect exists between available assets and the capital raised to acquire them, as dry powder for oil and gas investment has significantly diminished.
Materials and Mining stocks had a negative month in June. The materials sector was -2.94% in June and +3.47% YTD. Gold prices remained relatively high in June as they last closed at $2,299.20, -1.02% MTD +11.48% YTD. Newmont Mining -1.19%, Mosaic -4.30%, Yara International -5.11%, Freeport-McMoRan -6.18%, Nucor Corporation -8.46%, Celanese Corporation -8.93%, Sibanye Stillwater -17.11%, and Albemarle -18.20%.
Global crude steel production shows modest growth in May, led by Asia and China. Global crude steel production experienced a y/o/y increase of 1.5%, reaching 165.1 million metric tons (Mt) in May 2024, according to the World Steel Association. However, on a year-to-date basis, from January to May, production witnessed a slight decline of 0.1%, totaling 793.2 Mt compared to the same period in the previous year.
The Asia and Oceania region, encompassing countries such as Australia, China, India, Japan, Mongolia, New Zealand, Pakistan, South Korea, Taiwan, Thailand, and Vietnam, accounted for the majority of global steel production in May 2024, with a total output of 122.1 Mt, marking a 1.6% increase y/o/y. China solidified its position as the leading steel producer, with a May output of 92.9 Mt, demonstrating a 2.7% y/o/y growth.
Freeport-McMoRan declares cash dividend.Freeport-McMoRan announced that its Board of Directors has declared a quarterly cash dividend of $0.15 per share on its common stock. This dividend is payable on 1st August, 2024, to shareholders of record as of 15th July, 2024. The dividend comprises a base dividend of $0.075 per share and a variable dividend of $0.075 per share, aligning with the company's performance-based payout framework.
Yara opens a renewable hydrogen plant in Norway. Yara International announced on 10th June the opening of its renewable hydrogen plant located at the Herøya Industrial Park in Norway. The plant, with a 24 MW capacity, is currently the largest of its kind in operation in Europe. Utilising renewable energy sources, the facility produces hydrogen through the electrolysis of water, replacing natural gas as a feedstock and reducing CO2 emissions from the site by 41,000 tonnes annually.
Nucor to acquire Rytec Corporation. Nucor Corporation announced on 3rd June the execution of a definitive agreement to acquire Rytec Corporation, a leading manufacturer and supplier of high-speed, high-performance commercial doors. The transaction, valued at $565 million in cash, represents approximately 12.5 times Rytec's estimated 2024 EBITDA.
Rytec, with a workforce of over 300 employees operating from two manufacturing facilities in Wisconsin, is renowned for its diverse range of high-quality door solutions. This acquisition marks a strategic expansion for Nucor beyond its core steelmaking business, further diversifying its product offerings in the commercial sector.
Commodities
Oil prices recovered in June with WTI +4.98% MTD and Brent +4.15% MTD. Lessened concerns regarding demand ahead of the summer season, as well as limited impact from geopolitical tensions in the Middle East have supported oil prices.
Dallas Fed Energy Survey reveals modest growth and shifting costs in Q2 2024. The oil and gas sector experienced growth in the second quarter of 2024, as indicated by executives responding to the Dallas Fed Energy Survey. The business activity index, a broad measure of conditions faced by energy firms in the Eleventh District, rose significantly from 2.0 in the first quarter to 12.5 in the second.
While oil and gas production remained largely unchanged during Q2 2024, there were subtle shifts within the sector. The oil production index saw a minor increase from -4.1 in the first quarter to 1.1 in the second, suggesting a stabilisation in production. Similarly, the natural gas production index also turned positive, rising from -17.0 to 2.3.
Cost trends diverged between oilfield services and exploration and production (E&P) firms. Oilfield services experienced a slightly accelerated increase in input costs, with the index rising from 31.2 to 42.2. Conversely, E&P firms saw a decline in finding and development costs, from 24.2 to 15.7, as well as a decrease in lease operating expenses, from 33.7 to 23.6.
The equipment utilisation index for oilfield services firms transitioned into positive territory, increasing notably from -4.2 in the first quarter to 10.9 in the second. Operating margins for these firms also showed improvement, with the index rising from -35.4 to -13.0, indicating a slower pace of decline. The index of prices received for services remained relatively stable at -4.4.
Employment within the sector remained relatively steady, with the aggregate employment index at 2.9, marking the 14th consecutive positive reading. This suggests a continued, albeit slow, pace of net hiring. The aggregate employee hours index remained largely unchanged at 8.1, while the aggregate wages and benefits index decreased from 32.8 to 24.0.
The overall company outlook index remained essentially unchanged at 10.0, with E&P firms expressing modest optimism (16.8) and services firms indicating a neutral outlook (-2.1). The outlook uncertainty index remained elevated at 24.1, suggesting a persistent increase in uncertainty.
Respondents on average anticipate a WTI oil price of $79 per barrel at year-end 2024, with a range of estimates from $62.5 to $100 per barrel. Participants expect the Henry Hub natural gas price to reach $3.01 per MMBtu at year-end. During the survey collection period, WTI spot prices averaged $79.94 per barrel, and Henry Hub spot prices averaged $2.61 per MMBtu.
Currencies
The dollar gained ground against a basket of major currencies in June. The euro was hit by the European parliamentary elections which resulted in French President Macron calling a snap election, while falling inflation and signs of an improving economy helped boost the euro.
The GBP is -0.75% YTD against the USD. The BoE held interest rates at 5.25% at its June meeting. The MPC voted 7-2 in favour of no change for a second consecutive meeting, with Swati Dhingra and Deputy Governor Dave Ramsden both backing a rate cut. It appears to have left the door open to rate cuts later in the summer, as expectations for a first rate cut have moved to August with markets pricing in more than a 50% chance of a rate cut at that time.
The EUR is -0.40% YTD against the USD. With inflation upto 2.6% in May from April’s 2.4%, the ECB still cut rates at the June meeting. However, the ECB has since said that it will remain data dependent. Markets are now pricing in 2 further cuts this year with a 30% chance of a third cut by the end of the year. However, wage pressures remain as the eurozone labour market remains tight, with unemployment at record low levels, falling to 6.40% in May from 6.50% in April.
Sterling still remains the best performing currency in the G10 vs the US dollar.
Cryptocurrencies
Bitcoin -9.95% MTD, -12.76% 3 Months and +45.28% YTD
Ethereum -10.67% MTD, -5.34% 3 Months and +48.12% YTD
Crypto markets have been hit by the US Fed decision to maintain interest rates at 5.25% in June and the prospect of only one rate cut this year. In addition there has been the outflow from Bitcoin Outflows from Bitcoin investment products, which has hit $630 million over the last week, with the total outflows in 14 days reaching approximately $1.1 billion, according to CoinShares. Bitcoin in particular may continue to be hit as options worth $6.68 billion and Ether options worth $3.5 billion are, as noted by CoinDesk.com, set to expire on the leading crypto derivatives exchange Deribit. The impending expiry, which represents over 40% of the current cumulative open interest of over $23 billion, has the potential to trigger volatility in the Bitcoin market.
Note: As of 6:30 pm EDT 26 June 2024
Fixed Income
US 10-year yield +11.0 basis points QTD +43.4 basis points YTD to 4.342%.
German 10-year yield +14.9 basis points QTD +44.4 basis points YTD to 2.453%.
UK 10-year yield +19.8 basis points QTD +60.0 basis points YTD to 4.139%.
US Treasury 10-year bond yields -26.6 basis points (bps) this month, reaching 4.236%.
Market expectations for a September rate cut by the Fed have increased this month, with CME's FedWatch Tool showing a 59.02% probability of a reduction of at least 25 bps, an increase from the 47.01% recorded at the end of May.
The benchmark German 10-year yield was -21.8 bps this month at 2.453%, while the UK 10-year yield was -18.2 bps through June at 4.139%. The spread between US 10-year Treasuries and German Bunds contracted by -4.8 bps from 31st May, it currently stands at 178.3 bps.
The French debt risk premium remained within striking distance of its seven-year high, hit almost two weeks ago on concerns of a budgetary crisis at the heart of Europe. The spread between French and German 10-year yieldswas last at 72.6 bps. It hit its highest level since February 2017 around 82 bps the day after president Emmanuel Macron called a snap election.
Italian bond yields, a benchmark for the eurozone periphery, were +2.3 bps this month to 3.991%. Consequently, the spread between Italian and German 10-year yields contracted -6.7 bps to 153.8 bps from 160.5 bps last month.
Money markets priced in cumulative 68 bps of ECB monetary easing this year, implying an additional 25 bps rate cut and a 70% chance of a third move in 2024.
France, Italy and Spain will release inflation data on Friday, while the German and euro area figures are due next week.
Note: Data as of 5:30 pm EDT 26 June 2024
What to think about in July 2024
Shifting consumer behaviour and corporate responses: a new chapter in the inflation story. A newfound resistance to price increases among American consumers is emerging as a significant factor that could further curb inflation in the coming months. Corporate anecdotes indicate a shift in consumer behaviour, with individuals who were once tolerant of rising prices now actively resisting them. This has forced businesses to adopt more aggressive strategies to attract shoppers, reminiscent of pre-pandemic tactics.
Prominent Federal Reserve officials recognise this evolving consumer sentiment as a potential key driver of disinflation, contributing to the normalisation of price increases. Fed Governor Lisa Cook, in a recent speech, highlighted several national retailers announcing price reductions on specific items and increasing evidence of higher-income shoppers opting for discount stores. Cook's forecast predicts that inflation will continue its downward trajectory, albeit with some fluctuations, as consumers' resistance to price hikes becomes reflected in inflation data.
Fed Governor Adriana Kugler echoed this sentiment, citing recent earnings reports from publicly traded companies that reveal a pullback in spending by lower-income consumers and a corresponding moderation or even reduction in prices by businesses.
The resurgence of price wars within the fast-food industry further illustrates this heightened price sensitivity among consumers. Major chains like McDonald's, Wendy's, and Subway have introduced aggressively priced value meals and breakfast options to appeal to budget-conscious customers. McDonald's USA President, Joe Erlinger, publicly acknowledged the financial strain experienced by consumers and emphasised the company's commitment to providing value in response to this pressure.
Similar dynamics are evident in the travel industry, where competition for price-sensitive leisure travellers is intensifying. Airlines are eliminating change fees and enhancing basic economy offerings to attract these customers.
This consumer pushback against high prices could signal a broader economic trend. During the recent NYSE/Bank of America London Investor Conference, Walmart's CFO highlighted the second quarter as the most challenging period for the company in terms of year-over-year comparisons, suggesting a potential softening in the retail environment. Target, facing similar challenges, has responded by introducing a promotional event to stimulate sales.
Despite these concerns, particularly among lower-income consumers, Wall Street analysts maintain a cautiously optimistic outlook on consumer spending. While higher interest rates may continue to weigh on borrowers' spending, robust household balance sheets are expected to provide support for overall consumption throughout the year.
The interplay between consumer resistance to price increases and businesses' adaptive strategies will likely play a crucial role in shaping the inflationary landscape in the coming months. The Fed's monitoring of these dynamics will be essential in guiding its policy decisions and maintaining economic stability.
Seasonality, positioning, and buyback blackouts: near-term challenges for Equities. Several near-term challenges are in focus, including typical late-June seasonality and quarter-end selling. JPMorgan recently estimated quarter-end rebalancing flows of approximately $50 billion out of equities.
A more significant concern appears to be related to market positioning. Deutsche Bank highlighted the recent sharp increase in equity positioning, driven entirely by the technology sector, to levels near the top of the historical range. While positioning is only slightly above levels implied by earnings and growth expectations, this recent ramp-up has occurred amid downside surprises in macroeconomic data. The firm also discussed nine consecutive weeks of equity inflows as indicative of a surge in risk appetite.
Furthermore, Deutsche Bank and other firms have highlighted the impact of share buyback blackouts leading into Q2 earnings season. It is estimated that companies representing nearly half of the S&P 500 market capitalisation will be in blackout periods by the end of the week. Notably, buybacks have been running above seasonal trends over the past few months.
Fiscal headwinds and monetary policy shifts: a complex outlook for Treasuries. In the longer term, fiscal pressure remains a significant concern for Treasuries, particularly following last week's Congressional Budget Office (CBO) update, which increased the 2024 deficit projection by 27%. Some strategists contend that neither US presidential candidate's fiscal plans would effectively address budgetary pressures, potentially straining funding markets as Treasury supply rises and the Fed continues its withdrawal.
Furthermore, some analysts anticipate a higher neutral interest rate than previously expected, which could establish a higher floor for yields in the coming years. The Fed's own longer-term federal funds forecast has risen from 2.5% to 2.8% over the past two Summary of Economic Projections (SEP) reports. This could imply that monetary policy is not as restrictive as perceived, potentially placing the Fed in a "higher for longer" stance even as markets anticipate steeper rate cuts.
However, Bank of America (BofA) strategists recently noted that the latest Financial Market Survey (FMS) indicated a peak in concerns about "fiscal excess," a development that historically preceded significant bond gains in May 2011 and November 2018. Additionally, some observers have highlighted structural shifts in demand that could mitigate risks, particularly as the Treasury increasingly relies on shorter-term issuance.
Overall, the long-term outlook for Treasuries remains uncertain, with fiscal pressures and potential shifts in Federal Reserve policy posing significant challenges. However, evolving market sentiment and structural changes in demand could potentially offer some relief. Continued monitoring of these factors will be crucial for investors and policymakers alike.
Key events in July
The potential policy and geopolitical risks for investors that could negatively affect corporate earnings, stock market performance, currency valuations, sovereign and corporate bond markets and cryptocurrencies include:
1 July - 31 Dec 2024 Hungarian Council presidency, EU. Hungary is due to take over the rotating presidency of the Council of the EU. Hungary’s leader Viktor Orbán, has repeatedly clashed with the EU on a number of policies.
9 July 2024 Second round of the French election. National Rally (NR), the far right party led by Marine Le Pen, could win for the first time. It is led by 28-year-old Jordan Bardella. There are 577 seats in the National Assembly, including 13 overseas districts and 11 constituencies that represent French nationals abroad. For an absolute majority a party needs 289.
9-11 July 2024 NATO summit, Washington, DC, USA. The 2024 summit will take place in Washington DC (US) and will mark the 75th anniversary of the establishment of the alliance. Ukraine’s possible NATO accession will be the key agenda item, although no invitation is likely to be made at this time.
16-17 July 2024 G7 trade ministers’ meeting. The meeting will take place in Villa San Giovanni in Reggio Calabria (Italy).
18 July 2024 European Central Bank Monetary Policy Meeting. The ECB will likely keep rates on hold during this meeting as it waits to see the impact of its first rate cut in June.
28 July 2024 Presidential elections, Venezuela. The government retains a mix of tools to ensure its desired electoral outcome, including control of the Consejo Nacional Electoral (National Electoral Council) and courts, use of the state-controlled media and using government-allied irregular militias to harass the opposition and its supporters. However, a credible opposition candidate, Edmundo González Urrutia, remains in the race against Nicolás Maduro, who has held the country’s presidency since 2013. Eight of 10 candidates, including President Nicolás Maduro, have signed an agreement binding them to respect the results of the contest as announced by electoral authorities.
30-31 July 2024 Federal Reserve Monetary Policy Meeting. The Fed will very likely continue to hold rates at this meeting given that again at this meeting.
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